As most folks are already aware, President Barack Obama’s State of the Union speech last month was heavy on Robin Hood ethics. But his proposal to raise the capital gains tax for the wealthy to pay for middle-income tax breaks is more a matter of robbing Peter to pay Paul than robbing the rich to feed the poor. The president is specifically proposing an increase to 28 percent on the top capital gains tax rate and qualified dividends for jointly filing couples who make $500,000 a year or more. He did not specify what the threshold would be for single filers, but it is assumed that it would be consistent with the current ratio to joint filers. He has also put forth plans to close a perceived loophole that allows people to inherit money tax-free, and to tax companies with assets over $50 billion. His combined tax reforms are expected to raise over $300 billion in revenue over the next 10 years. But while this may be good news for the national budget, it’s only encouraging investors to clutch their wallets – hurting businesses and families domestically and diminishing our competitive edge globally. Currently, the capital gains and dividend tax rate is 20 percent for joint filers making $450,000 a year and single filers making $400,000 a year. It was raised from 15 percent in 2012. There’s another factor now affecting the tax rate on investment income for Americans – the Affordable Care Act. Those who meet the income threshold for the top capital gains tax rate also pay 3.8 percent of their investment income in Medicare Hospital Insurance taxes. As yet, it is unclear whether President Obama’s proposed increase in the tax rate includes those ACA taxes or not. In total, the wealthiest Americans pay almost 40 percent in income taxes. The bolstering of the middle class is of critical importance, but President Obama’s plan is a superficial solution to the problem of income inequality. The fact is, there aren’t enough good-paying jobs to sustain a strong middle class. And raising taxes is a major disincentive for companies to expand their operations and hire employees, and for individuals and companies to sell their assets. When the government keeps chipping away at its citizens’ hard-earned income, it doesn’t exactly inspire people to spend with confidence. There are other long-term revenue losses to consider as well. Economists refer to capital gains and similar taxes as the “service price of capital.” When the service price of capital inches upward, there is less money at the user’s disposal. A recent analysis by the Tax Foundation suggests that an increase in the capital gains tax rate would actually result in a reduced Gross National Product, lower stock prices and reduced wages and hours. The oft-touted increase in revenue may be exaggerated as well – the president’s figures do not necessarily take into account the inevitable change in realized gains and dividends or other economic impacts. While knowledge of an impending spike in the capital gains tax rate may prompt people to sell their assets quickly, the positive economic effect will be short-lived. Evidence has shown that the hesitance to realize gains that follows a bump in the tax rate can last for several years, which the country definitely cannot afford. The Valley Industry & Commerce Association feels that President Obama’s proposed changes in tax policy are akin to a house built on sand – they are overly simplistic and short-term solutions to the country’s disappearing middle class. Our leaders should be focusing their energies on building a strong foundation for businesses and making it easy to invest in one’s community. Stuart Waldman is president of the Valley Industry & Commerce Association, a business advocacy organization based in Sherman Oaks that represents employers throughout the Los Angeles County region at the local, state and federal levels of government.
