Mr. Biden’s Capital-Gains Tax Hike Plan is the Biggest in History, it Fixes Nothing

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All wealthy Americans must take the time to understand Mr. Biden’s tax plan and how would affect their businesses. Mr. Biden is not a businessman, and most legislators are not either, so they must be told that America is a business, and Bernie Sanders Socialist tax policies are not fitting.” — Paul Ebeling

Mr. Biden’s proposed tax plan includes raising long-term capital gains tax rates and taxes on dividends to 39.6% for American’s making more than $1-M a yr. That would be an increase from the current 23.8%, marking the biggest hike in capital gains taxes in US history. The topic did not get much attention during the campaign, but it has the potential to cause a lot of economic distortion.

Historically, the capital gains tax rate has been lower than taxes on ordinary income, which is the taxes paid on salary or business income.

Wealthy Americans pay a disproportionate amount of these taxes, because they are more likely to hold financial assets such as stocks, bonds and real estate. This is why it is not unusual for them to pay lower effective tax rates than lower income people.

However, it is not like raising the capital gains tax rate will fix the perceived ‘inequities‘ in the US tax code.

Tax experts estimate that increasing capital gains taxes in the way suggested by Mr. Biden would result in just $469.4-B in revenue over 10 yrs. And most of the forecasted tax revenue will be back-end loaded and is insignificant when compared with the many trillions of annual government outlays.

Capital gains taxes account for about 5.2% of federal tax revenue on average.

The radical element of Mr. Biden’s tax plan is to impose payroll taxes on income above $400-K. For those who draw a salary, this means paying an additional 6.2% in tax on top of a 39.6% marginal rate.

For business owners and other self-employed people, both the employer and employee side of the tax must be paid, resulting in an additional 12.4% in tax on Top of the 39.6% marginal rate leading to an actual Top marginal rate of 53%.

So, after raising capital gains taxes on wealthy Americans, there is still the situation where small business owners will pay a higher marginal tax rate than wealthy people with investments, and most likely a higher effective rate, to boot. And, while a 39.6% rate on capital gains would be close to the highest in history, the difference now is that there would be no exclusions to lower the effective rate.

That happens is this: nighened rate results in a situation where those sitting on substantial gains will choose to hold their assets far longer frames than otherwise, known as the “lock-in effect,” imposing “efficiency losses because investors may be encouraged to hold suboptimal portfolios.” 

This means that investors will hold a stock for tax reasons, rather than selling it and buying a better one, which leads to market inefficiencies.

Plus, low tax rates on capital gains encourage investment, which is good for the economy over the long term.

Raising the capital gains tax will result in creative attempts to sell assets synthetically for the purpose of avoiding taxes notes businessman/tax expert Bruce WD Barren.

As an example, if a wealthy American holds shares of an ETF, he/she can sell short an ETF that is a close proxy, resulting in a nearly hedged position and leaving it to the IRS to determine whether transactions like these constitute a constructive sale that will trigger a gain for tax purposes.

The tax people at reputable US brokerage firms have devised hedging strategies that fall within the letter and/or spirit of the law.

And there is this to consider: A about 18% of US household wealth is held in the form of private businesses, which have a large stock of unrealized capital gains. The experts describe capital gains taxes as an asymmetric tax on successful business ventures. Meaning that if you start a business and it fails, you have a limited ability to deduct the losses from your taxes. But, the gains are fully taxed. This is a powerful disincentive to entrepreneurism.

So, Mr. Biden at this particular time in US history when the rate of small business formations is the highest ever, as the economy is coming out of the VirusCasedemic, it is very unwise to try to take legislative action that makes being in or starting a business harder. 

Biden’s Result: Diminished federal tax income as big businesses and wealthy investors will leave the US tax jurisdiction, just as Mark Zuckerberg (Facebook founder) did when he moved to Singapore plus John Templeton, when he established his Nassau, Bahamas-based Templeton Growth Fund

There is also another Facebook investor, Brazil-Born Saverin, who emigrated to Miami with his family in 1998, but now lives in Singapore, which imposes no capital-gains tax. As a resident there, Saverin reportedly could save as much as $100 million in U.S. taxes. The 30-year-old Saverin currently ranks 634th on Forbes’ list of the world’s billionaires.

All of that while Mr. Biden focus is enlarging the welfare state. We expect to hear more from him next week on his new version of ‘infrastructure.

What concerns me most about raising individual and corporate taxes is that it will kill the incentive of creative business people to set up shop in the US, the very backbone of our industrial greatness, and go elsewhere,” says LTN’s economic expert Bruce WD Barren.

Working to Make America Great Again!

Have a healthy weekend, Keep the Faith!

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