Bet you would have liked to of known that before it passed in the House. The Democrats are in much too much of a hurry to let anyone scrutinize these bills before they vote on them.
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.
And as you can probably guess, that didn’t exactly work out great in 1986:
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.
That analysis is from the perspective of government revenues, but more important here is the impact this would have on the economy. Which, given its already weakened state, would be devastating.
At a time when we want more economic activity, to create more prosperity and more jobs, we’re going to nail investors who drive that activity with a massive tax hike?
That’s madness. It’s a recipe for more economic stagnation and more unemployment and, generally, more misery.
But the Democrats have themselves between a rock and a hard place. The deficits they’ve created are becoming politically inconvenient, and so their health care bill can’t appear to add to them. That means massive tax hikes, but it also means in turn more recession.
Which is something some (such as myself) have been warning about since the beginning of the Obama administration. Going on a spending spree to save the economy and create massive new entitlement programs like this health care represents won’t promote economic rescue, as the Democrats claim. Instead, it will only ensure that our recession goes on for longer and is more hurtful than it had to be.