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Cato Institute Director of Tax Policy Studies Chris Edwards on the potential impact on increases in the capital gains tax rate on investors and econom...
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Well lessons and hours old and new year and nothing rings in the new year better than the government raising your taxes right the capital gains tax rate is set to increase.
-- percent tomorrow that's up from the current 15% -- some argue this would generate more money.
For Uncle Sam but my next guest has a laundry list of reasons why raising the rate will hurt both investors and the US economy Chris says.
-- as director of tax policy studies.
At the Cato institute and the editor of downsizing government dot -- happy new -- is Terry thank you for joining us on this holiday thank you let me ask you real quick why won't to raise more money if we raise the capital gains tax -- -- to raise more money for treasury.
Wall because capital cardinal while we live in a globalized economy if United States raises its taxes on capital in other words investment.
Investment will simply flee across international borders so.
Countries that have high tax rates on capital shoot themselves in the foot.
And for that reason just about every industrial country has that some -- has cut -- capital gains tax rate.
So for example our our capital gains tax rate tomorrow.
-- jump up to 24%.
We have state level taxes on top that brings us to 28%.
But the average in the industrial world is just 16%.
That's because just about every country realizes.
If you have a high capital gains tax rate you shoot yourself in the foot and you lose invest so now crude is the rate go up for starting tomorrow is it everybody is -- does it started 400000 that lived for its its if you make less than 400000 a year -- capital gains rate remaining 15% for -- Quite the capital gains right -- it's it's on the highest earners so people in the bottom.
Brackets the 1015%.
Tax brackets.
Will pay the lower rate so it is just for the highest earners but they are the most important investors in the economy.
For example venture capitalists and Angel investors.
Who have been crucial to Silicon Valley and are high tech industry these are very high earning individuals.
They invest in high tech companies to earn capital gain in so you raise the capital gains tax you're gonna kill off an Angel and venture capital investment unionized.
I think we have a graphic that shows what the capital gains tax the United States has been going all the way back to 1980 at one point it was it 28%.
That's when President Reagan and his administration cut it.
I at one point in it was during the Clinton administration.
Down to 20%.
1997.
Through 2003.
Let me ask you about that when it was a 20% didn't we enjoy -- tech boom didn't tainted to drive investment away then why wouldn't drive investment away now we go back to 20%.
Because the 24%.
Or 23 point 8%.
Is really on the highest highest highest we're -- warm Buffett incomes at that point.
Why you know it's there's a lot going on the in the economy at any time other than the capital gains tax rate.
I'm I am saying that if we raise it to lie it.
We do risk -- and high tech investments so you know there's a lot of economists frankly argue that our tax rate on capital gains ought to be zero.
And in fact there's about a dozen high income countries like the Netherlands -- -- -- Even Mexico actually have capital gains tax rates -- zero.
So I think the benchmark here is zero.
Because capital gains is so important.
And it actually represents double taxation.
Capital gains income was already taxed at the corporate level we don't need -- tax it again at the individual level forgive my.
-- tax ignorance here but I do have a question that might be important so funny US citizen and let's say I invest in another country.
When I sell that investment like pay the capital gain of that -- -- -- pay it in the United States since I'm a citizen of the US.
I you pay both but then you get what's called the floor and tax credit.
For your -- and taxes paid basically the US treasury taxes you want your worldwide in com however it does credit -- For some of the -- -- taxes you paid would would credit with the credit I wouldn't that minimize the impact of the increase here in the United States or is it the other direction.
And it forces investors to seek those investments overseas as opposed to here where they pay the higher capital gains tax.
What's important here is that we want foreign ambassadors to come to United States and invest in our growth companies and and our high tech companies.
I've we have high capital gains tax rate it's gonna hit those foreign investors so we want in investment money flowing into United States.
And we have high tax rate -- going to be scaring away that inflow of investment and we certainly saw a lot of people selling off some of their assets at least in equities.
Up until today in order to avoid the higher capital gains tax oh that's right.
Chris celebrated his exit yes -- I've got to wrap it up here but I appreciate you joining us you have good new -- sir and I'm sure this is going to be an issue that congress is gonna try and address.
As we -- 2013.
Iraq.
