For those who argue that a doubling of the LTCG rate for individuals with taxable income over a million won’t affect the average investor:

“What are some of the economic implications of the proposals if enacted? First, there is the effect on individual realizations of long-term capital gains. At the American Council for Capital Formation we have monitored this effect closely for 42 years. Realizations of long-term capital gains—particularly those of high-income investors—are very sensitive to changes in capital-gains tax rates. Such investors respond to increases in these taxes by holding on to their gains for longer—sometimes indefinitely. There is no doubt that an approximate doubling of the top capital-gains tax rate would lead to a substantial reduction in the realization of long-term gains. The Congressional Budget Office estimates this elasticity is 1.2 in the short-run. This means that for each 1% increase in the capital-gains tax rate. there would be a 1.2% decline in capital gains realizations. But there hasn’t been a capital-gains tax increase of the magnitude proposed by Mr. Biden in recent history. The reduction in realizations it would cause could be even more severe than 1.2%.

In any case, a doubling of the top capital-gains tax rate would greatly restrict the mobility of individual capital, which Kennedy warned affects the flow of capital to new and smaller business ventures. Also, it would never raise anywhere near the tax revenues that its proponents claim. These claims are based on government tax-expenditure tables that use “static” analysis, ignoring the rather obvious “dynamic” effects of changes in realizations and economic growth. Interestingly, the negative effect on some state tax receipts could be substantial. States like New York and California (and some municipalities, notably New York City) rely heavily on realizations of capital gains, which would drop significantly.

If lawmakers want to increase tax receipts from wealthy individuals, they should lower the top capital-gains rate. Such a step would jump start realizations that even now are somewhat depressed. That’s what happened in 2003, when the rate was reduced to 15%.

Finally, in a global economy, policy makers can’t ignore how other countries handle capital-gains taxation of investors. Mr. Biden’s proposed capital-gains tax would exceed the top rate in every one of 10 largest economies. The average top capital-gains tax in these countries is about 23%.“

[Post edited by Hoos Operator at 08/10/2020 11:02AM]