On Tuesday, the president signed the Democrats’ health-care-reform bill, but the House’s “reconciliation” bill of fixes has yet to become law. The Senate will is debating it now and might vote on it this afternoon.
Among the bad provisions that the reconciliation bill would add to the law — special deals, an increase in the employer tax per uncovered worker from $750 to $2,000, a federal takeover of the student-loan industry — is an assault on the burgeoning investor class: a new 3.8 percent Medicare tax on capital gains and dividends. Between this and the hike that was already slated to come at the end of this year, the tax on investment income (which applies to single filers making $200,000 or more and married filers making $250,000 or more) will jump from 15 percent today to 23.8 percent in 2013 if the reconciliation bill passes.
Such an enormous tax hike is very bad news for financial markets, retirees, investors, and even the U.S. Treasury. The Left likes to call investment returns “unearned income,” an absurd phrase that ignores that capital is formed from already-taxed income and that corporations pay an additional 35 percent income tax before any value flows through to shareholders. The capital-gains tax is an unfair and inefficient double tax. The proper rate is therefore zero, and even relatively small increases can do big economic damage.
Capital formation is critical for starting businesses, buying new equipment, investing in research and development, and encouraging innovation. Every increase in the capital-gains tax punishes investors by lowering their after-tax rate of return, discouraging risk-taking and thus preventing investments from taking place. That means less productivity growth, less job creation, and lower wages throughout the economy. We need more capital gains, not less, to accelerate our economy’s lackluster recovery.
The tax hike scheduled for the end of the year — which was set up in the law that enacted the 2003 tax cuts, and will push the rate from 15 percent to 20 percent — is already a deterrent to capital investment. One of the most effective stimulus policies the federal government could adopt would be to repeal that impending tax hike and give investors the all-clear to make investments based on the existing 15 percent rate.