President Biden, with the help of the same old gang who did such a great job holding back the economy under President Barack Obama, last week unveiled his proposal to double the capital gains tax rate to 39.6% and “really stick it to rich people!” for a second time in as many weeks.
Democrats like to tax things they hate, such as cigarettes and gasoline, so people will use less of each. Apparently, they don’t understand the same principle applies when applying higher tax rates to corporate and capital gains taxes as well — they will get far less of both with much higher rates.
Biden’s first attempt was to raise the corporate tax rate to 28%, which will not even cover the cost in lost revenue for their repeal of the Trump SALT restrictions. Rich people in New York and California will receive most of the SALT tax-repeal benefits, not the average taxpayer.
President Biden didn’t say exactly how he and the IRS were going to outsmart the smartest financial people in the world on Wall Street or in any major corporation. They think they can browbeat sophisticated investors into paying every cent they think rich people owe without them changing any behavior or finding new ways to shelter income from taxation.
Capital gains taxes are perhaps the most volatile of all tax revenue since they are totally dependent on economic conditions at time of sale. Capital gains tax collections in a given taxable year have ranged from a high of 5.9% of all federal revenues to a low of 2.8%.
In 2018, federal capital gains tax revenue from all sources, including average-income Americans, was $158.4 billion. Overall tax collections are expected to be $3.7 trillion in 2020.
Biden’s proposal will affect anyone making over $1 million per year, which can, and will, ding hundreds of thousands of moderate-income farmers and small businesses that sell assets after a lifetime of hard work and investment. Depending on how long an asset has been held, a good part of capital gains is nothing but good old inflation, not real capital gains.
Close to 86,000 people with incomes over $1 million filed a Schedule D in 2020 declaring capital gains or losses. Many are very sophisticated investors who can outsmart any congressional representative, U.S. senator, Capitol Hill staffer or president when it comes to maximizing profit and minimizing tax payments.
One wealthy investor told me his investment fund hasn’t paid any capital gain tax in years due to sophisticated programs that match portfolio gains with losses.
What White House and congressional Democratic leaders don’t seem to realize is that uber-wealthy people have a plethora of options to minimize their tax exposure. About half of all capital gains reported each year are offset by capital losses, which lowers capital gains tax payments by 50%.
One wealthy investor has told me his investment fund hasn’t paid any capital gain tax in years due to sophisticated programs that match portfolio gains with losses. Wall Street has smart people who know how to use computers as well as any in the Silicon Valley.
Wealthy investors should band together to “cancel” Biden’s capital gains tax hike by pairing as much loss as they can against capital gains profit and essentially drive any new projected tax revenue gains by the Biden White House to zero over the next three years. They should “go on strike,” in effect, against the ravenous taxing and spending spree leftist Democrats and Biden are on right now.
The left may feel better about their futile attempt to soak the rich and bask in the accolades of their fellow comrades in arms. However, sophisticated investors will have the last laugh, again, as they always do.
When all is said and done, the only people who are going to be hurt by the Biden capital gains tax hikes are the same people who get hurt by any tax hike: average-to-marginally-higher-income taxpayers who cannot afford to pay expensive lawyers and tax accountants to avoid getting hit by adrenaline-fueled Democratic tax spasms.
Wait until they see what Biden and the Democrats want to do with inheritance taxes and stepped-up basis, which is a subject Kelly Johnston deals with on the opposite page.
Many of them are probably #NeverTrumpers and moderate Democrats and Republicans who voted Joe Biden into office in the first place.
C’est la guerre.