Don't Hike The Capital Gains Tax

The rule for doctors, "First Do No Harm" should also apply to politicians promising to "reform" the tax code.The federal tax code is too long -- 74,000 pages -- too complicated, too confusing, and too expensive for taxpayers.

It needs to be radically changed. But there is the right way to do it and the wrong way.

We should move to taxing income one time at one rate. Today we tax the same dollar over and over. When you earn it, when you save it, when you invest it and if you are stupid enough to die, the government takes another bite.

Congressional Republicans understand this goal. The House GOP's "Better Way" tax reform blueprint cuts taxes for ALL American businesses and families and reduces or eliminates double taxation, like the capital gains tax which needlessly discourages saving and investing.

Big government liberals want to go in the other direction. They want a code more complex and one of their favorite targets is hiking the capital gains tax. They know they can only raise the top ordinary rate so much higher than it is today without wrecking the economy.

Instead, they take aim at cracking the firm conservative opposition to raising the capital gains tax. Their long-term policy goal is higher taxes, with ALL capital gains taxed as ordinary income, and for that rate to be very high. Sometimes they deride the capital gains tax as a "loophole" that needs to be closed. Other times they see raising it in increments as the best way to achieve their long-term policy goal of higher taxes. Regardless of the proposal, the end game is the same.

President Obama hiked the capital gains tax rate from 15 to 20 percent for individuals earning $400,000 or more and then Obamacare imposed a 3.8 percentage point "surtax" on capital gains. The president's budgets have called for a hike in the rate to 28 percent from the current 23.8 percent, and have called for limiting the use of section 1031 "like-kind exchanges," a common-sense section that allows investors to pay taxes only when they cash-out -- not if they choose to reinvest earnings into another asset.

Hillary Clinton would only perpetuate Obama's misguided effort. Already, she has called for a byzantine capital gains tax with six brackets for those whose total taxable income puts them in the 39.6 percent bracket. This proposal is supposed to fix the problem of short-term investment, even though investors make decisions based on value, not length of time.

She doesn't stop there. She also wants to raise taxes on "carried interest" capital gains earned by investment partnerships. Taxing these partnerships will damage your pension or 401(k), your favorite charity and the college your child will attend.

This proposal has nothing to do with taxing "hedge fund guys," as some claim. Income from capital gains has always been taxed at a lower rate because it is income that has already been earned and taxed at individual rates. Economists have said again and again that capital gains income should not be taxed and studies have shown that even supposedly modest increases would have strong adverse economic effects.

For instance, a study by Ernst and Young found that repealing like-kind exchanges would cost the U.S. economy $13.1 billion in lost GDP year after year if used to finance more government spending.

Even using like-kind exchanges as an offset for tax reform would lead to a $6.1 billion annual GDP loss over the long term because repeal would result in a "lock-in" effect where businesses are arbitrarily discouraged from making investment decisions because of tax consequences. Similarly, hiking carried interest capital gains could raise as little as $3.1 billion over a decade while hurting pension plans, colleges, charities, and the middle class.

The capital gains tax is always derided as a "loophole" by big government politicians that want tax reform to be a tax increase. After outright raising the capital gains tax, they are running into resistance. So now, they are going after provisions like carried interest and like-kind exchanges.

After eight years, we have seen quite enough tax hikes on capital gains recently, and there should be absolutely no more of them.