Fiscal Cliff: Capital Gains Tax

David Williams

December 20, 2012

The United States of America has long been viewed as a place that if you work hard and save anything is possible.  These possibilities included achieving the American Dream of being able to purchase a home, send children to college and eventually retire.  That dream may become a nightmare in 2013 as the capital gains tax rate is slated to increase from 15 percent to more than 20 percent for middle-income Americans.   The capital gains tax is the tax that is paid on the sale of equities, real estate and other assets.

While it is understood that the tax code is used to create incentives for certain behavior, the type of behavior that a low tax rate on capital gains is precisely the type of behavior we want and need to grow our economy and not one we want to disincentive through higher taxes.   As economist Daniel Mitchell pointed out in, “Principles of good tax policy and fundamental tax reform is that there should be no double taxation of income that is saved and invested. Such a policy promotes current consumption at the expense of future consumption, which is simply an econo-geek way of saying that it penalizes capital formation.”

So in essence by increasing taxes on capital gains it will be more difficult for Americans to save for retirement.  One of the few bright spots in the economy is the real estate market which has started to see a rise in some housing prices and an increase in building.  Unfortunately, one of the unintended consequences about increasing the capital gains rate could be putting more unneeded pressure on the real estate market.  As CNBC’s Robert Frank explained, “Real-estate experts say that as more of the wealthy sell out of fear of a tax increase, they could drive up inventory and lower prices in the top of the real estate market, which has been one of the few bright spots in the economy. Any softening at the high end, or a spike in inventory, could ripple through the housing market and add new pressure to prices, although it could also increase sales volume.”

Americans understand market capitalism and know what is inherently good and bad for economic growth.  Allowing the government to keep more of the money that you saved and invested is not one of the drivers of economic growth.  Scott Summer described it best when he said that a proper rate on capital gains should be zero because, “ONE of the most basic principles in economics is that the taxation of capital income is inefficient.”  Government has show over and over again to be a poor steward of taxpayer resources and by giving it more resources is a recipe for disaster.

Congress and the President are playing a dangerous game of “chicken” with the economy and taxpayers as the country gets closer and closer to the fiscal cliff.  The real losers in this game are taxpayers and an economy that may not be able to sustain these massive tax increases.  And, remember, no matter what happens in the economy next year, members of Congress are guaranteed their jobs and salaries of $174,000 per year ($285,000 with benefits) and the President is guaranteed to keep his $400,000 per year job.