05.31.2010 0

Increasing Capital Gains Tax Decreases Capital

  • On: 06/15/2010 22:44:55
  • In: Taxes
  • By Rebekah Rast

    If the government thinks people are going to sit idly by and continue their normal routines come Jan. 1, 2011, when President Bush’s tax cuts expire, it is wrong. Americans will change and adapt to new tax rates by whatever means benefit them—not the government.

    It is risky business in this type of economy to be tampering with raising the rates of taxes—especially those taxes that impact the engine that drives America—small businesses.

    The Administration’s talk of raising capital gains and dividend taxes is alive and well. Even raising the capital gains tax from 15 percent, where it is now, to 20 percent, as is being discussed, might persuade investors to have an initial change of heart before being so willing to invest. After all, they will receive an immediate hit on their capital compared to what it would have been if the tax rates remained unchanged.

    When Americans invest in companies and their stocks it creates more capital for that company and allows American-owned businesses to grow and flourish while providing more jobs and more stability to the marketplace. If those investing have to pay more of their own capital to the government it will only discourage investment, lower capital for businesses and prevent growth and employment opportunities.

    “Higher tax rates will reduce the amount of investment by U.S. businesses at home and abroad, and will reduce their ability to compete at home and abroad,” says JD Foster, Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation.

    This goes completely against Obama’s master plan and promised No. 1 priority, to focus on job creation. By taxing capital gains at a higher rate, tax revenues will not increase at the rate the government has projected. Instead the government will get less investment in American-owned businesses, fewer private sector jobs being created and a national debt that continues to grow.

    Capital gains and dividend taxes aren’t the only taxes going up in the near future. Many other taxes that were a part of President Bush’s tax cuts are also expiring, like the estate tax, personal income tax and even some state and local taxes face another increase in 2011.

    The Administration is hoping tax increases will bring about more revenue for the government. Instead, these increases will drain the private sector of the capital needed to create jobs and grow the economy.

    In a Wall Street Journal editorial, Arthur Laffer wrote, that if people know taxes are going up next year, then they will make necessary adjustments this year. “They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.”

    He went onto write, “When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe ‘double dip’ recession.”

    This is something no one wants to see happen. How can this scenario be prevented? It’s quite simple. Do not destroy private sector growth by penalizing businesses or individuals with higher taxes.

    Instead of raising the capital gains tax many leading economic thinkers are urging Congress to do away with it altogether.

    “The capital gains tax should be abolished since it is a destructive form of double taxation that applies if people save and invest,” says Daniel Mitchell, Ph.D., Senior Fellow at The Cato Institute. “Raising the tax on capital gains will undermine growth. Some small businesses will be hit hard, but the main negative effect is broader, since a capital gains tax discourages both the amount of investment and the efficiency of investment.”

    With a 9.7 percent unemployment rate in America and with small businesses being forced to close their doors, now is not the time to raise taxes.

    “If the capital gains and dividend taxes increase, then America will suffer,” says Bill Wilson, president of Americans for Limited Government (ALG). “We need to encourage small businesses to grow and Americans to invest in American-owned companies. This Administration needs to understand the damage that would be done if these taxes were increased.”

    It is time the government looked beyond itself to see what would best benefit America. It would be wise for the Administration to acknowledge that higher taxes would not help our economy, unless they want more unemployed Americans on their hands.

    Rebekah Rast is a contributing editor to ALG News Bureau.

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