One of the most prominent U.S. economists is warning that not only will President Joe Biden’s proposed hike on capital gains taxes fail to finance his proposed multi-billion-dollar programs, but it will also hamper entrepreneurial efforts and disrupt investments in research and development, particularly in the high-tech sector that has fueled economic growth over the past decade.
The Biden Strategy: The president’s proposal, which was leaked to the media last week and is scheduled to be formally introduced during his address to a joint session of Congress Wednesday evening, would increase capital gains taxes on those with annual incomes of more than $1 million, with the top rate rising from 20% to 39.6%. When factoring in a surtax related to Medicare, the total rate on capital gains would be 43.4%.
On the surface, the tax increase would barely impact Americans. According to the most recent Internal Revenue Service data, only 540,000 taxpayers had incomes of $1 million and higher, or 0.3% of the taxpaying population.
Nonetheless, investors did not view the Biden proposal as a problem for somebody else. When word of the proposal was published on April 21 in media reports citing unnamed sources, the Dow Jones Industrial Average tumbled by 321.41 points, a 1% drop.
But Will It Work? In an interview with Benzinga, Peter Morici, professor emeritus of the Robert H. Smith Business School at the University of Maryland and former director of the Office of Economics at the U.S. International Trade Commission, pointed out that while the Biden plan does not encompass a wide swath of the American public, it nonetheless targets the people who have the financial ability to reshape the nation for the better.
"If you go that level on people with incomes over a million dollars, you're simply going to have a lot less startups and you're going to have a lot less investment in R&D," said Morici. "You're going to have a lot less investment in the tech sector, and you're going to have a lot less growth because we're going to be taxing capital and investment much more heavily than labor. We're basically going to become a labor-intensive society – it's that simple."
Morici predicted that whatever funds would be accumulated if the proposed tax hike becomes law would not pay for the multitude of infrastructure and social projects proposed by the White House.
“He probably will have less money in the long run,” he continued. “Numerous studies have been done that indicate when you raise the price of something, your revenue goes up. But after a certain point, it starts to go down because consumption goes down – it is an elasticity issue.”
Morici also opined that the push for a capital gains tax increase is being primarily driven by a political agenda rather than an economic game plan.
“People on the left just want higher taxes on wealthy people,” he said. “It's remarkable – liberals seem to think a carbon tax will reduce carbon consumption and the cigarette tax will make people smoke less. But taxing capital won't make people use capital less – that's silly. This White House team went to a very peculiar school of economics.”
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