Thinking Citizen Blog — Biden’s Capital Gains Tax Increase: Good Idea? Bad Idea? Why?

John Muresianu
3 min readMay 11, 2021

Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day

Today’s Topic: Biden’s Capital Gains Tax Increase — Good Idea? Bad Idea? Why?

Tax it get less of it, subsidize it get more of it. Is it a good idea to have fewer capital gains? Should not all tax rates be the same? Why should the capital gains tax be lower than the income tax? Should capital gains be taxed only when “realized” (when the asset is sold) or should accrued gains be taxed? Should the value of assets be “stepped up” at death (the “angel of death” loophole)? Experts — please chime in. Correct, elaborate, elucidate.

THE RATIONALE FOR RAISING THE CAPITAL GAINS TAX

1. Increase revenue to fund needed spending to improve the lives of the neediest.

2. Reduce economic inequality which is at historic highs.

3. Details: The Biden plan would raise the maximum capital gains tax from 20% to 43.4% (if you include state income taxes, the rate could rise to 48%).

NB: Only 3% of American families have gains above the $1 million threshold.

INCREASING THE CAPITAL GAINS TAX RATE MIGHT NOT INCREASE REVENUE (Wall Street Journal, first link)

1. “Evidence that President Biden’s capital-gains tax increase is counterproductive keeps rolling in, and the latest is from the Penn Wharton Budget Model, a nonpartisan outfit often cited as an authority by Democratic economists.”

2. “Penn Wharton estimates that raising the top capital-gains tax rate to 43.4% would shrink federal revenue by $33 billion over 10 years.”

3. “That’s a smaller hit than the Tax Foundation’s $124 billion loss, but it acknowledges the same economic reality. Taxpayers in range of the higher top rate will find ways to shrink their bills.”

THREE REASONS WHY THE CAPITAL GAINS TAX IS LOWER THAN THE INCOME TAX (Tax Foundation, second link)

1. “First, the tax is not adjusted for inflation, so any appreciation of assets is taxed at the nominal instead of the real value. This means investors must pay tax not only on the real return but also on the inflation created by the Federal Reserve.”

2. “Second, the capital gains tax is merely part of a long line of federal taxation of the same dollar of income. Wages are first taxed by payroll and personal income taxes, then again by the corporate income tax if one chooses to invest in corporate equities, and then again when those investments pay off in the form of dividends and capital gains.”

3. “Finally, a capital gains tax, like nearly all of the federal tax code, is a tax on future consumption. Future personal consumption, in the form of savings, is taxed, while present consumption is not. By favoring present over future consumption, savings are discouraged, which decreases future available capital and lowers long term growth.”

https://www.wsj.com/articles/the-capital-gains-revenue-illusion-11620341526

Why Capital Gains are taxed at a Lower Rate | Tax Foundation

https://www.brookings.edu/blog/up-front/2020/01/14/how-could-changing-capital-gains-taxes-raise-more-revenue/

https://www.forbes.com/advisor/investing/biden-capital-gains-tax-plan/

https://www.wsj.com/articles/bidens-capital-gains-tax-increases-would-hit-few-americans-study-says-11620207001

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John Muresianu

Passionate about education, thinking citizenship, art, and passing bits on of wisdom of a long lifetime.