“The White House is considering raising the capital gains tax rate to 39.6 percent on people earning $1 million and over,” Fox Business reports. For context, the capital gains tax is “a tax on the growth in value of investments incurred when individuals and corporations sell those investments,” according to Investopedia.
The current top capital gains rate is 20 percent, so this hike would amount to roughly a doubling of the tax. And in 13 states, such as New York and California, with their own levies on capital gains, Biden’s proposal would result in some residents facing rates of more than 50 percent.
How does the president justify such a massive increase?
“[The president’s] view is that [paying for the proposals] should be on the backs...of the wealthiest Americans who can afford it," White House Press Secretary Jen Psaki said. "And corporations and businesses who can afford it.”
But top free-market economists interviewed exclusively by FEE warn that the entire economy, not just the wealthy, would suffer from such a significant capital gains tax increase. In particular, they warn that heightened taxes on capital gains would hamper investment in small businesses.
“Doubling the top capital gains tax rate from 20% to 40% may make for a good progressive talking point but its economic effect would make it hard for small businesses and hardworking Americans, as it would create a significant reduction of financing for small businesses,” Mercatus Center senior fellow and economist Veronique de Rugy said.
Why would it reduce available financing for small businesses?
“Capital gains are the reward for risky investments,” she explained. “Cut the return on these investments and you will get fewer of them. New and innovative companies may never see the light of day for lack of capital.”
“The higher the capital gains tax rate, the lower the incentive to invest in more risky investments, and the higher the incentive to invest in safer investments like government bonds,” de Rugy concluded. “This sharp hike will reduce the availability of capital for small business owners, for new tech companies and others.”
Cato Institute economist Chris Edwards agreed that hiking capital gains taxes would hamper investment.
“The reward that angel investors receive for putting their time and money into startups is a capital gain five or more years down the road,” Edwards explained. “Raising capital gains taxes would prompt angels to shift their money to safer investments, starving the economy of fuel for dynamic industries such as technology.”
And it’s not just “Big Business” or “the 1%” who would take a hit, the economists argued. American workers and consumers would suffer.
“Tax increases would reduce entrepreneurship,” Edwards offered. “People considering launching startups would instead take safer wage jobs because the chance to earn a capital gain from a high-growth startup would not be worth all the extra stress, risk, and hard work.”
President Biden would seemingly have us believe that we can have it all: Massive new amounts of government spending without most Americans bearing any cost. But subjecting this narrative to even minimal economic scrutiny exposes it for the political wish-casting it truly is.