It’s Time to Abolish the Capital Gains Tax
President Biden’s ridiculously high spending proposals require equally ridiculous tax proposals. Among the craziest proposals is a massive increase in the capital gains tax rate. According to the Tax Foundation, Biden’s proposal would raise the top federal rate on capital gains tax to 43.4 percent. When accounting for state and local rates, the average top rate would be 48 percent, up from the current 29 percent. This is about nineteen steps in the wrong direction. Progressives, the largest proponents of the tax on capital gains, believe that this tax is a necessary and just tool used to rein in the greed of the rich and ensure that the selfless government can implement righteous social programs to help the needy. This belief could not be further detached from reality. The existence of taxes on capital gains significantly distorts the natural flow of investment in markets, which harms the social welfare of all Americans, and it is past time to abolish the capital gains tax.
The capital gains tax is imposed on the profits gained from the sale of an asset. This increases the costs involved in realizing the profits of an investment, therefore altering individuals and businesses’ cost-benefit analysis and decision process when evaluating investment opportunities. This has a substantial impact on the reallocation of capital and the availability of capital, because investors have to take the capital gains tax into account when weighing if a new investment is worthy. Investors are forced to decide if the new investment has a profit potential that outweighs the impact of the capital gains tax and the future profit potential of whatever asset they may currently be invested in. Many investors decide it is not. This creates the “lock-in effect.” The capital gains tax creates the incentive for investors to retain their current subpar-performing investments even when more profitable investment opportunities are present. This keeps capital locked into inefficient and underperforming assets as opposed to more efficient and profitable assets. Therefore, these inefficient assets
Article from Mises Wire