photo by Boyd Loving
the staff of the Ridgewood blog
Ridgewood NJ, the stock market had been predicting that the Biden Administration would call for a 28% capital gains tax, so when the word came out last week that he wants a 43% capital gains tax, it triggered a stock sell off. A share of stock is simply worth its after-tax and after-inflation rate of return, so a higher capital gains tax (combined with and a higher corporate tax) translates into lower stock values, by definition.
How confiscatory is the Biden proposal? Consider what it means for taxpayers in the highest tax states like NJ, and NY one of which was until recently the country’s financial capital. Tax increases will continue to lead to a title wave of out-migration .
The all-out tax assault on capital is not even about funding Biden’s big government spending programs. High capital gains tax rates are more likely to cost the federal government revenue than to raise it, because investor will sit on highly appreciated assets until rates come back down , or even until retirement when they have less income. This is called the “lock in” effect of the tax.
History shows that capital gains realizations are highly negatively associated with the capital gains tax rate – which means less liquidity in capital markets and less available funds for new start up-businesses.
As this chart shows, historically, lower capital gains tax rates have resulted in higher revenue and in the 1970s when we had Biden-like rates, revenues were very low. So a higher capital gains tax is bad for the economy and bad for the U.S. Treasury. The effect is often referred to as the Laffer Curve .
The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffer’s argument that sometimes cutting tax rates can increase total tax revenue. The idea of reducing tax rates to gain more revenue was was used during the Coolidge administration to pay off the debt from World War 1 . Coolidge believed the people deserved to keep as much of the money they earned as possible, and to have the funds they contributed to the national government managed responsibly.
President John F. Kennedy, 1963 said it best , “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital … the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”