Sunday, May 26, 2024

What are Capital Gains and Why Do Experts Fear Biden’s Tax Plan Could Harm U.S. Economy?

HomeBusinessWhat are Capital Gains and Why Do Experts Fear Biden's Tax Plan...

In a move that has economists and business leaders sounding the bankruptcy alarm, President Biden is proposing to jack up taxes on investment gains to the highest level in more than a century. The bombshell plan would send the top rate on long-term capital gains and dividend income skyrocketing to an eye-popping 44.6% – a level not seen since the days of jazz clubs, prohibition, and economic boom times of the Roaring Twenties.

Biden’s call for this draconian investment tax hike has drawn heated backlash from critics who warn it could put a big chill on the very economic engines that power prosperity: business investment, productivity gains, and wage growth. They argue the plan runs counter to the fundamentals of economics – if you tax something more, you inevitably get less of it.

“Investment is the real driver of economic growth. It’s what gives you productivity gains and allows businesses to provide workers with the tools to increase wages,” said E.J. Antoni, an economist at The Heritage Foundation. “Taxing capital gains means less investment, which means less economic growth overall and a slower rise in living standards for Americans.”

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Under Biden’s proposal outlined by the Treasury Department, the already steep 20% top rate on capital gains would nearly double to 37%. This is on top of other tax increases aimed at households making over $1 million per year. But economists like Antoni caution the fallout could cripple the broader economy.

Because capital gains taxes hit the sale of assets like stocks, whose prices rise with inflation, the tax is essentially a second tax on inflation itself when those assets are sold. This could potentially incentivize the government to keep inflation running high to rake in more tax dollars, Antoni warned in an ominous prediction.

“Here is Biden proposing the highest capital gains tax rate in a century,” said Mike Palicz of Americans for Tax Reform. “This directly hits the retirement nest eggs and life savings of millions of Americans pursuing their investment dreams.”

The plan could be particularly devastating for small businesses and family-owned enterprises looking to cash out when owners retire or sell their companies. Parents passing businesses to their children would face mandatory capital gains taxes on the appreciated assets – a punitive new tax on the transfer of generational wealth.

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In perhaps the most baffling part of Biden’s blueprint, the ultra-wealthy would face a 25% tax on unrealized capital gains from assets they still own and have not sold – a direct tax on wealth itself, not income. Perplexingly, this includes theoretical “gains” that exist only on paper due to asset price fluctuations.

The tax blitz is projected to raise around $800 billion according to some estimates. But skeptics like Antoni dispute inflated rosy revenue forecasts, noting they wrongly assume taxpayer behavior and investment patterns would stay frozen despite the dramatically higher rates.

“The idea this will raise trillions is based on people not responding at all to these punitive new taxes by changing their behavior,” Antoni said. “But we know from history that when you hike taxes to extreme levels, people absolutely do change their actions to avoid them. It’s just human nature.”

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Biden’s defenders say the plan aims to finally make hugely profitable corporations and the ultra-rich pay their “fair share” after years of tax avoidance. By cracking down on loopholes, they insist the tax will still encourage economically productive investment overall while funding key national priorities.

However, with an unprecedented capital gains tax spike not seen in over 100 years, Biden’s proposal is already setting up as a major political and economic battle royale in Congress. Critics view it as an unbridled tax-and-spend agenda that could hammer economic vitality and prosperity.

As D.C. gears up for heated budget negotiations, lawmakers will be weighing the potential multibillion dollar windfall against widespread warnings the plan could dampen the engines of investment, productivity and income growth that have long powered the American Dream. No matter where they fall on the political divide, the soaring capital gains tax is shaping up as a defining issue that could profoundly impact the trajectory of the U.S. economy for years to come.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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