OPINION:
The latest tax increase proposed by the Biden administration could mean losing more than half your investment returns. While the radical left is marketing these higher tax rates as “tax fairness” and “tax equity,” the actual effect will be to punish Americans who are saving for retirement.
If enacted, this proposal would raise the top tax rate on capital gains to 39.6% — about double the current rate. This would be the highest capital gains rate in over 100 years and apply even to assets many middle-class Americans plan to use as part of their retirement nest egg.
But tax-happy politicians aren’t stopping there. They also want to increase the top net investment income tax rate to 5%. That means the federal government would take almost 45 cents of every dollar whenever your investments grow, including for your retirement.
It’ll be even worse depending on where you retire or sell assets, such as a home. States including Florida, Tennessee and Texas don’t have a capital gains tax, but other states do, and sometimes it’s even higher than a state’s income tax rate.
In Georgia, Virginia and Wisconsin, the state and federal taxes combine to take over half your capital gains. It’s even worse in California, Minnesota and New York — the total government take in each of those states is over 55%.
And that’s not even the scariest part of this story. Capital gains aren’t indexed to inflation, so you’ll pay tax on assets that haven’t even increased in real value.
Inflation occurs when prices rise almost everywhere because the dollar is losing value. This effect stems from one of the functions of money, which is a kind of yardstick. A higher or lower price signals to buyers and sellers that something has a higher or lower value, respectively. Making accurate comparisons, however, requires a consistent yardstick.
If you measure a football field from end zone to end zone, it’ll be 100 yards long. If you measure the same field tomorrow, however, and it’s now 120 yards, that means your yardstick shrunk from 36 inches to just 30. That’s what happened to the dollar over the last 3½ years — it has lost about 20% of its value, so it takes more than before to purchase the same things.
That’s why the government can charge you capital gains taxes even when your investments haven’t increased in value. Over the last 3½ years, the Dow Jones Industrial Average stock index has increased substantially in price. Still, almost 70% of that increase has been the dollar losing value, as opposed to an increase in the real worth of its constituent companies.
Had the proposed higher tax rates on capital gains already been in effect, people saving for retirement would have been absolutely devastated. They would owe such large capital gains tax bills that their inflation-adjusted rate of return on investment would be negative.
In other words, the proceeds from their investments, although larger in terms of dollars, could buy less today than when the smaller sum was originally invested.
This proposal for sky-high capital gains tax rates is terrifying but not surprising. It’s part of a broader attack on wealth by the radical left, which views all economic progress as misbegotten gains that should be penalized and taxed to extinction.
As if inflation and the current cost-of-living crisis weren’t painful enough, the radical left wants to extend that pain through your retirement years, too.
• E.J. Antoni is a public finance economist and the Richard F. Aster fellow at The Heritage Foundation, and a senior fellow at the Committee to Unleash Prosperity. Ben Ottosson is an intern at Heritage’s Grover M. Hermann Center for the Federal Budget.
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