The 69% increase in capital-gains taxes

posted at 2:30 pm on November 12, 2009 by Ed Morrissey

The House plan for ObamaCare that passed on Saturday contained a plethora of new and increased taxes, which the Americans for Tax Reform listed in an effort to make Americans aware of the burdensome cost of the bill.  The Wall Street Journal reports today on one aspect of the new taxes that ATR missed.  The Pelosi Plan, if passed by the Senate, would increase capital-gains taxes 69% from their present level, making them higher than any time since the first Clinton term:

House Democrats are funding their new entitlement with a 5.4% surtax on incomes above $500,000 for individuals and above $1 million for joint filers. The surcharge is intended to snag the greatest number of taxpayers to raise some $460.5 billion, and so the House has written it to apply to modified adjusted gross income. That means it includes both capital gains and dividends.

That surtax takes effect on January 1, 2011, or the day the Bush tax rates of 2001 and 2003 expire. Today’s capital gains tax rate of 15% would bounce back to 20% because of the Bush repeal and then to 25.4% with the surtax. That’s a 69% increase, overnight. The last time investors were hit with anything comparable was 1986, when the capital gains rate jumped to 28% from 20%, a 40% increase, as part of the Reagan tax reform that lowered income tax rates.

How did that increase work out in 1986?  Not so well, as it turns out:

The 1986 experience was not a happy one. Tax revenues from capital gains surged before the increase took effect in 1987, as investors moved to cash in at the lower rate. Revenues then plummeted. Total realized capital gains didn’t again reach their 1985 level of $172 billion until 1996. By 1992, the federal government was barely getting more in revenue ($29 billion) at the 28% rate than it did in 1985 ($26.5 billion) at the 20% rate.

Rate reductions, as in 2003 when Republicans cut the rate to 15% from 20%, have typically had the opposite effect. Treasury receipts from capital gains climbed to an estimated $117.8 billion in 2006 from $49 billion in 2002.

Once again, this is an example of the folly in using static tax analysis for public policy, perhaps especially on capital-gains tax rates.  Democrats in 1986 — and now — assume that hiking the CGT rate by 69% will produce 69% more revenue that what was received at the old rates.  That doesn’t take into account market behavior after tax conditions change.  A capital-gains tax hike will push investors to cash out before it hits, and then shelter their assets rather than putting them to work.  After all, at a CGT rate of 25.4%, they would probably pay less tax by getting interest off of their cash than by assuming the risk of losses and paying higher tax rates on the gains.

During the presidential campaign, Barack Obama stumbled when he first proposed at CGT rate of 28%.  His big-money backers reeled from the idea, and later Obama reduced it to 20%, still a significant increase.  Nancy Pelosi has jacked it back up again, and one has to wonder whether all of those Wall Street wizards who supported Obama in 2008 are having buyer’s remorse yet.

If they don’t, voters certainly will.  Obama needs investors to return to the market in order to start getting new jobs created in significant enough numbers to lower unemployment — and fast.  Hiking the CGT rate will have the opposite effect.  In fact, the rate of escalation may push capital overseas entirely, which would make the economic stagnation a long-term proposition, and double-digit unemployment a fixture of the Obama administration.

The Pelosi Plan would strangle the economy.  If Obama expects to minimize his mid-term losses, he has to get the Senate to strip out the enormous escalation in CGT rates.


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Comment pages: 1 2

reaganaut on November 12, 2009 at 3:30 PM

If you make over 34000 dollars you pay 25% income tax while capital gains sits at 15%.

The Calibur on November 12, 2009 at 3:37 PM

The Pelosi Plan, if passed by the Senate, would increase capital-gains taxes 69% from their present level, making them higher than any time since the first Clinton term

:

–This is a surtax of 5.4% on the modified adjusted gross income of over $500K for individuals and $1 million for married couples filing jointly. It doesn’t just apply to capital gains. It would also raise the top marginal tax rate on all income to 44.4% from 39%.

Jimbo3 on November 12, 2009 at 3:37 PM

The government let them call it “capital gains,” which meant that the money was taxed at only a fraction of the rate that incomes were taxed.”

- Michael Hudson

The Calibur on November 12, 2009 at 3:30 PM

I don’t keep up with changes in the tax laws since my money is in IRAs, but it used to be you had to keep money invested for at least a year for it to be a capital gain. Some tax laws have a progressively lower rates the longer the investment is held. Hedge funds found a way around that. That one type of abuse is no reason to mess up the rest of the economy.

pedestrian on November 12, 2009 at 3:38 PM

“No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

nelsonknows on November 12, 2009 at 3:39 PM

I’m getting sick of this crap.. Take someone with two kids on welfare. Put a value on just what they get. First, you have the monthly amount received – that’s income. Then what is the value of food stamps in money? What is value of the free healthcare they get – put a value on it. Then there is the Earned income credit and all the other social programs that they get for nothing. Put a value on all of that, since it’s income. Then why don’t they pay taxes? We MUST buy life insurance at work and we are taxed on that as income.

This is a bunch of BS.

suzyk on November 12, 2009 at 3:45 PM

I don’t keep up with changes in the tax laws since my money is in IRAs, but it used to be you had to keep money invested for at least a year for it to be a capital gain. Some tax laws have a progressively lower rates the longer the investment is held. Hedge funds found a way around that. That one type of abuse is no reason to mess up the rest of the economy.

pedestrian on November 12, 2009 at 3:38 PM

–The 15% rate applies to capital assets held more than a year (long term capital gains) and to qualified dividends (generally, normal dividends paid by US companies). If you sell a capital asset held less than a year, it’s a short term capital gain and you’ll pay tax at the normal income tax rates, not the lower 15% rate.

Jimbo3 on November 12, 2009 at 3:45 PM

I used to just think these people were idiots. But I’m now convinced, based on the preponderance of the evidence, that liberals hate the United States of America as it was intended.

Devrbd on November 12, 2009 at 3:46 PM

Since Geitner wants to outlaw venture capital too, you’d think they almost hate the idea of small and new businesses even being created.

lorien1973 on November 12, 2009 at 3:47 PM

Devrbd on November 12, 2009 at 3:46 PM

Yep. It only makes sense, if you assume it’s deliberately malicious.

lorien1973 on November 12, 2009 at 3:48 PM

Obama doesn’t care if something brings in less revenue. He cares only that it is “fair” – he said so in the debate.

He wants people with more money to be punished and lose that money, and people with less money to be given the money. It is his highest principle, and stands way above any pragmatic considerations or the health of the country.

Face it, he’s a commie.

Alana on November 12, 2009 at 3:49 PM

Obama does not care what the rich or what anyone thinks about taxes, or about him any more.

He knows his ratings are tanking but he is determined to get his “Obamacare” stamp on history.

All else is secondary. As he rallied the dumb dims last week he told them over and over how this is the time to leave “our” mark, a mark as important as social security.

He sees this as his legacy. I pray we can deny him that satisfaction.

FireBlogger on November 12, 2009 at 4:11 PM

“I’d like to give a shoutout to Karl Marx…” -Obooba.

Akzed on November 12, 2009 at 4:14 PM

My gosh! What sort of stupid game is this? How can they think this is good government?

This does not benefit anyone in any way!

Our government has gone insane!

petunia on November 12, 2009 at 4:21 PM

http://www.forecasts.org/unemploy.htm

With an unemployment forecast such as this it would seem that investment by “monied” folks would make more sense than them cashing out as Ed observes. I couldn’t find the link for another forecast I read yesterday that commented a forecast as high as 12-13% unemployment before the unpleaseantness turns around. This is based upon the continuing meltdown of the housing market (values) and the upcoming/predicted crash of the commericial real estate loan portfolios.

None of this speaks to the static, simplistic hallucinations that the Nance has about raising a rate and not seeing a market reaction. All she’d have to do is ask her hubby. He’ll be amongst the first to bail out and preserve his cash.

Robert17 on November 12, 2009 at 4:37 PM

This is going to kill farmers.

Oink on November 12, 2009 at 4:48 PM

What part of lower taxes bringing in more revenue and actually stimulating economic growth do they not get?

Seriously…this has to be a Leftist cabal intent on taking America down “a few notches” from within.

Dr. ZhivBlago on November 12, 2009 at 4:51 PM

Jimbo3 on November 12, 2009 at 3:45 PM

Geez Jimbo3. For a guy that needs my help to pay for his health insurance, you sure seem to know a lot about finances. I fully intend to just let Simple Simon and Grow Fins do the yard work and you can come inside and help with my taxes instead.

hawkdriver on November 12, 2009 at 4:53 PM

This is going to kill farmers.

This is going to kill the country.

hachiban on November 12, 2009 at 5:00 PM

Let them dump all the taxes they want on us … the sooner the better – and the more hurt … the better.

If Americans are really smarting next November and the economy is a total trainwreck – we may be able to take every seat in the house.

That’s what it may take to get into a position to retrieve the porkulus funds and ObamaCare.

HondaV65 on November 12, 2009 at 5:07 PM

In 10 or 15 years if Democrats stay in power this will be a socialists country.

taney71 on November 12, 2009 at 5:13 PM

Pelosi Plan would strangle the economy.

.
and your little dog too!

ronsfi on November 12, 2009 at 5:13 PM

Jimbo3 on November 12, 2009 at 3:45 PM
Geez Jimbo3. For a guy that needs my help to pay for his health insurance, you sure seem to know a lot about finances. I fully intend to just let Simple Simon and Grow Fins do the yard work and you can come inside and help with my taxes instead.

hawkdriver on November 12, 2009 at 4:53 PM

I do. But I have three magic words I depend on: “Turbo Tax software”

Jimbo3 on November 12, 2009 at 5:27 PM

This is going to kill farmers.

Oink on November 12, 2009 at 4:48 PM

–If you’re a farmer, and this increase kills you, you’re doing better than almost any farmer I’ve heard of. Most of them seem to barely be able to break even in this economy.

Jimbo3 on November 12, 2009 at 5:28 PM

Wonderful! I lost my job and now support myself through stock trading, its like they want me to be on welfare!

Daveyardbird on November 12, 2009 at 5:29 PM

Today’s capital gains tax rate of 15% would bounce back to 20% because of the Bush repeal and then to 25.4% with the surtax.

Well the surtax won’t hit me; but I’ll be surprised if the Dems leave the long-term rate at 20% and don’t hike it further.

Oddly I have approximately $0 in capital gains earnings right now in my portfolio… its like I must have sold anything with a gain to take the tax hit this year; how could that have happened? *whistles innocently*

this is an example of the folly in using static tax analysis for public policy, perhaps especially on capital-gains tax rates. Democrats in 1986 — and now — assume that hiking the CGT rate by 69% will produce 69% more revenue that what was received at the old rates. That doesn’t take into account market behavior after tax conditions change. A capital-gains tax hike will push investors to cash out before it hits, and then shelter their assets rather than putting them to work.

Ed, are you reading my mail again?

gekkobear on November 12, 2009 at 5:59 PM

Unbelievable.

Griz on November 12, 2009 at 6:06 PM

Wonderful! I lost my job and now support myself through stock trading, its like they want me to be on welfare!

Daveyardbird on November 12, 2009 at 5:29 PM

They do. That’s the untold dealio with the Democrat Party. Don’t you watch Glen Beck? *whistles innocently*

Griz on November 12, 2009 at 6:08 PM

Americans are the last free people on the planet,when we go under the boot, the NEW WORLD ORDER can begin.See ya’ll in hell.

huckelberry on November 12, 2009 at 6:18 PM

They better take their best shot right now because when 2010 comes it will be all over for the whole crooked bunch.

Kissmygrits on November 12, 2009 at 6:24 PM

–If you’re a farmer, and this increase kills you, you’re doing better than almost any farmer I’ve heard of. Most of them seem to barely be able to break even in this economy.

Jimbo3 on November 12, 2009 at 5:28 PM

Sad but quite true. Just one generation earlier a good portion of my immediate and extended family either lived on family farms or made livings from same…now almost nobody does. If my one uncle hadn’t gone high tech (he now does DOD contracts, of all things!) he’d be as sunk as the Titanic.

Dark-Star on November 12, 2009 at 6:46 PM

I lost about 40% of my portfolio value last year. Since then, it’s come back about 20% but if they really want to pass this turd sandwich I will sell off before everyone else does. Ya hear that:
I SELL ALL MY STOCK THE DAY THIS IS SIGNED INTO LAW.

Not out of malice, but out of common sense. The same common sense that 95% of all investors have.

Meric1837 on November 12, 2009 at 2:56 PM

When Uhhhhhbama first started getting traction in his campaign I switched all of my retirement savings into government bonds.I didn’t lose half of my money like most of my coworkers did, and was able to draw it all out when I retired.So far the tax rates haven’t gone up on it yet.I’ll still get hammered because it’s counted as income this year.

darwin-t on November 12, 2009 at 11:59 PM

If you make over 34000 dollars you pay 25% income tax while capital gains sits at 15%.

The Calibur on November 12, 2009 at 3:37 PM

What’s wrong with that?

MarkTheGreat on November 13, 2009 at 8:13 AM

Capital gains tax should never be lower than income taxes. Lower the income tax or raise capital gains. We tax work more than investment, which is asinine.

The Calibur on November 12, 2009 at 2:46 PM

People who invest don’t work? Are you asinine?

MarkTheGreat on November 13, 2009 at 8:16 AM

Just a brief look at it, but it appears they may have a good case.

Johnnyreb on November 12, 2009 at 2:46 PM

This has been gone over many times. This is not a bill of atainder (sp?).

MarkTheGreat on November 13, 2009 at 8:17 AM

The 2002 to 2006 comparisons are misleading in the extreme. The market had been in decline for three years and stock volume flat.

Bleeds Blue on November 12, 2009 at 2:48 PM

What’s misleading is your attempt to pretend that capital gains equals Dow Jones.

MarkTheGreat on November 13, 2009 at 8:18 AM

The 2002 to 2006 comparisons are misleading in the extreme. The market had been in decline for three years and stock volume flat.

Bleeds Blue on November 12, 2009 at 2:48 PM

You also ignore the fact that it was the tax cuts that enabled the stock market to recover in the first place.

MarkTheGreat on November 13, 2009 at 8:20 AM

and the percentage of trades that are the result of the kind of speculation that doesn’t really create capital.

Bleeds Blue on November 12, 2009 at 2:48 PM

Speculation can produce capital. Since it makes economic activities more efficient, which results in more capital being created.

MarkTheGreat on November 13, 2009 at 8:23 AM

Um, Junior, you might want to stick to topics you’re expert in,

MNHawk on November 12, 2009 at 3:01 PM

He’s a liberal, which in his mind makes him an expert in every subject.

And if reality refuses to cooperate, we’ll just adjust the computer models until it does.

MarkTheGreat on November 13, 2009 at 8:24 AM

When did our country become more focused on risk than work?

The Calibur on November 12, 2009 at 3:09 PM

Without people who are willing to take a risk, there would be no jobs for anyone.

MarkTheGreat on November 13, 2009 at 8:27 AM

This increase applies only to those above $500,000? If I’m reading that right, I don’t think there will be a lot of talk about it.

AnninCA on November 12, 2009 at 3:21 PM

WHich means it will hit every small business in the country.

MarkTheGreat on November 13, 2009 at 8:29 AM

Comment pages: 1 2