President Obama’s proposed changes to the capital gains tax would hurt the economy and the middle class, according to analysis by the nonpartisan Tax Foundation.
“While the stated intent of the proposal is to target only high-income families, a dynamic analysis indicates that the effect on the economy would not be costless, nor would the impact be solely felt by wealthy taxpayers — all other income groups would see lower after-tax incomes,” according to the analysis. “Moreover, the plan would actually lose tax revenues, not gain them.”
Tax Foundation economists say Obama’s capital gains tax hike would decrease employment by 134,579 jobs per year and cut the economy by 0.8 percent, or $142 billion, per year. Wages would fall by an estimated 0.7 percent. Despite the higher rate, tax revenue would actually fall by almost $12 billion when the negative economic effects are accounted for.
One problem is that the middle class and the wealthy buy and trade the same public companies — and the wealthy buy and sell much more of the stock. When the higher tax on them is priced in, they are not willing to pay as much, and stocks immediately lose value. Everyone who holds stock — including middle class families with tax-deferred retirement plans — takes a hit. This effect comes on top of the normal opportunity costs that all tax increases have — pulling more money out of the economy and reducing opportunities for investment and consumer spending.
This is why, when Congress passed and President Clinton signed a cut in the capital gains tax in 1997, stocks rose in value immediately and transactions increased dramatically. The effect was so pronounced that this was a rare case in which a simple tax-rate cut actually resulted in an increase in the amount of revenue brought in by the tax in question.
Obama pitched the capital gains tax hike as a way of making the rich pay their fair share. However, the Tax Foundation analysis shows the economic hindrance would hurt everyone in the economy, including low- and middle-income families. Families with incomes between $50,000 and $75,000 would see their after-tax income fall by $461 a year. Those earning $10,000 to $20,000 would lose $128 a year. The wealthy would still be hit hardest, with incomes over $1,000,000 losing an estimated $67,939 a year.
Obama’s capital gains tax proposal would increase the top rate on capital gains to 28 percent, up from the current 23.8 percent. The rate was 15 percent when he took office in 2009.
Obama also proposed a new tax on big banks and expanding the capital gains tax to inherited gains. In addition, he proposed a new credit for two-earner families and tax changes to child tax benefits. The Tax Foundation did not account for the economic effects of these other tax changes, opting to focus on a 28 percent capital gains tax rate.
The analysis was conducted by Tax Foundation President Scott Hodge and Fellow Michael Schuyler.
