The Biden Administration has proposed increasing the top rate on long-term capital gains from 23.8% to 43.4%. Here’s an interesting fact: the top capital gains tax rate in China is 20%. Chinese citizens are allowed, even encouraged, to buy and own stocks in Chinese companies. They can invest and become wealthy, as long as they don’t challenge the Chinese Communist Party. That Chinese model – a political dictatorship, a market economy and low taxes for investors – continues to generate rapid economic growth.
In the business and financial world, it is generally understood that long-term capital gains are different from ordinary income and thus should be taxed differently, at lower rates. Long-term capital gains can be heavily eroded by inflation. Lower capital gains tax rates reward the patient capital needed to create and build businesses. Net capital losses are generally not deductible against ordinary income, so if the government isn’t willing to share fully in losses from risky economic investing, it shouldn’t take a large part of any net gain.
Additionally, capital is mobile, so this issue matters from a global perspective. Not one of the world’s ten largest economies taxes individual long-term capital gains at or close to ordinary income rates.
China has made no secret of its desire to become the world’s leading economy, and the President has acknowledged this, labeling Beijing’s intentions to displace U.S. global leadership as “deadly earnest”. If the proposed tax increase becomes law, the U.S. will have significantly impaired a key engine of its growth: the individual risk-taking needed to innovate, start companies and create jobs.