Why Stop at Small Business for Nixed Capital Gains Taxes?

Some hopeful signs for lower or maybe even nixed capital gains tax rates. BNA's Daily Tax Report reports on the economic benefits of eliminating capital gains taxes on small businesses in new survey results released earlier this month by National Association for Business Economics:

"NABE's semiannual economic policy survey asked 203 respondents to rank several possible proposals in order of what they thought would be most effective to increase employment. After capital gains tax elimination, the most popular options were a broad-based reduction in corporate income tax rates, and a reduction in employer payroll taxes to stimulate hiring at small businesses."

Looks as though these findings have reached the desk of new Ways & Means Chairman Sander Levin who says he's in favor of giving small businesses a break on capital gains taxes to spur job creation. Greg Hitt of Wall Street Journal reports today:

"[Mr. Levin] said the small-business measure would likely include a proposal to create a new capital-gains tax break for small businesses. The proposal would allow firms to exclude 100% of their capital gains from taxation this year, up from the 75% exclusion currently allowed…"

Why stop at small businesses? Most economists will agree that while small businesses are an economic driver, it’s entrepreneurship and new businesses--small, medium and large--that historically have boosted the national wallet as did the 1978 capital gains tax cut and subsequent Silicon Valley boom.

If Chairman Levin and his leaders truly want to prime the pump for job creation, economic stimulus and retirement security, an across-the-board cut in capital gains taxes for businesses of all sizes will show greater return.

Better hurry, though; the clock is ticking before the sun goes down on the 15% rate.

Don't Kick Investment While It's Down

A sobering note from a March 1 Bloomberg News article reports that capital gains tax receipts dropped more than 40% in 2008 due to the stock market crash.

The quick and easy fix to all of this of course is elementary—achieve higher stock prices. Most mainstream economists agree that a lower capital gains tax rate will spur the kind of investment necessary to boost investment on Main Street and promote higher stock prices on Wall Street.

Sadly, anyone looking for a light at the end of the tunnel will quickly despair as any recovery will likely feel the chilling effect of a potential 52% jump in the maximum capital gains tax rate. See our earlier post here.

The Stealth Attack on Investment

Job creation and economic growth are certainly great buzzwords these days, but while the left hand of Washington's leadership espouses investment and growth, the right hand is quickly killing it.

A February 24th Wall Street Journal editorial sums it up well:

This new ObamaCare bargain would for the first time apply the 2.9% Medicare payroll tax to "interest, dividends, annuities, royalties and rents," so-called passive income that we are told includes capital gains, though the latter wasn't explicitly mentioned in the proposal. This antigrowth investment tax would apply to singles earning more than $200,000 and joint filers over $250,000 and comes on top of the Senate's 0.9-percentage-point increase in the payroll tax, which would bring the combined employee-employer share to 3.8%.

The rate hike on investment income would presumably take effect at the same time the 2001 and 2003 Bush tax cuts are due to expire next year, bringing the top rate to 22.9% as the current top capital gains rate would also rise to 20% from 15%, That’s a 52% jump, and the last time investors were slammed with anything comparable was 1986 when the capital gains rate bounced to 28% from 20%—or a 40% increase—as part of the Reagan tax reform that reduced income tax rates.

In part this is a sneaky way of waging the House's war on "the rich" by other means while appearing to compromise. Speaker Nancy Pelosi's 5.4-percentage-point "surcharge" on modified adjusted gross income above $1 million—which also includes capital gains—was supposedly too extreme for the Senate, but the White House is trying to smuggle in its 2.9-percentage-point cousin. Of course, $250,000 is a lot lower income threshold than $1 million, and the rate can always be inched up later once the tax is already in place.

The War on Entrepreneurship, Our Nest Eggs and Job Creation Continues…

Upon taking office there was little if any doubt that President Obama would allow capital gains tax rates to expire from the current 15% and rise to 20%. Last summer, Democratic leaders in congress kicked around additional tax hikes on capital gains to finance health care reform measures.

Today the latest battle in the war on entrepreneurship continues as the president outlines his new health care reform proposal. Among the multiple tax increases wrapped into the proposal is yet another capital gains rate tax increase as reported in Bloomberg News:

"President Barack Obama proposed the first Medicare tax on unearned income including capital gains, while raising fees on drugmakers and scaling back a levy on high-end benefits as part of a new plan to overhaul the nation’s health-care system….

"The proposed tax would also apply to capital gains, an administration official confirmed. That would push the rate to 22.9 percent in 2011, up from 15 percent currently and 20 percent scheduled to take effect next year. Obama also embraced the Senate proposal for an increase in the Medicare payroll tax on the highest earners."

Can the U.S. really afford to fall further behind other major economies that enjoy far lower capital gains tax rates? More than half of the countries surveyed in a study by the ACCF have individual capital gains tax rates lower than that of the U.S. An even higher capital gains tax rate will put us at more of a competitive disadvantage.

Samuelson and the "can-do" culture

A hat tip today to Washington Post columnist Robert Samuelson and his piece on the impact of the Great Recession on the "can-do" culture, risk taking and entrepreneurship that is desperately needed to save our spiraling economy.

Risk-taking entrepreneurs are a major force for technological breakthroughs, new start-up companies, and the creation of high paying jobs. Many today believe that the ’78 cut in capital gains tax rates not only helped make Silicon Valley the center of technological breakthroughs but has also had a strong, positive, and lasting impact on overall investment, economic growth and job creation in the U.S.

Samuelson notes:

If Americans don't continue to create firms -- not just high-tech start-ups such as Facebook but construction companies, florists, restaurants, dry cleaners, engineering firms -- the economy may languish. Beginning a business is a risky, exhausting, chaotic process. Every year, there are roughly 500,000 to 600,000 company "births" and almost as many "deaths." Half of new firms don't make it to year five, says Litan.

Here's the moral of the story.

There's a warning here for the Obama administration: Complex regulations or high taxes may discourage start-ups and job creation. As for broader questions, the answers may remain murky for years. Has the mix of economic trauma and aging made us prudent -- or merely fearful? Has economic resilience survived -- or given way to a stand-pat society?

Let's not forget our competitive standing with the rest of the world. A report by Ernst & Young LLP, commissioned by the ACCF compares individual long-term capital gains taxes among 25 major economies of the world as well as major trading partners of the U.S. More than half of the countries surveyed have individual capital gains tax rates lower than that of the U.S. See special report here.