Set Capital Gains at a Permanent 15%
With near-double-digit national unemployment gripping our country, the White House and Washington should be asking a simple question: What can we do to make America the most competitive environment in the world for job creation?
An important first step — with broad support from America's business community — would be to remove uncertainty and make permanent the 15% rate on capital gains and dividends.
Faced with the threat of a dramatic tax increase in 2013, American businesses, investors and families are hamstrung by uncertainty when making consequential investment and financial decisions.
The threat alone of large tax hikes on capital gains and dividends is damaging. But a guaranteed new 3.8% tax from the health care law starting in 2013 coupled with the potential sunsetting of the income tax rates of the last decade would mean effectively a 58% higher tax rate on cap gains and as much as a 189% higher tax rate on dividend income.
That would be devastating and have a far-reaching economic impact. As President Obama rightly insisted in August 2009, "you don't raise taxes in a recession."
While some have used this pro-jobs tax rate in a political theater to make broad statements about social classes, a serious consideration of the facts proves the real need for these continued rates.
If raised, American companies would have less to invest in their business to create jobs and to innovate, stable "value" businesses facing higher dividend taxes would be less incentivized to pay out dividends to investors, investors of all sizes facing higher taxes would have less money and less opportunity to invest in the market and families — particularly seniors who rely heavily on steady, fixed dividend income — would have less each month to pay their bills.
It directly affects families' bottom lines. Assume a business wants to distribute $100 of taxable income to shareholders in a dividend. That $100 is already subject to double taxation. It first faces $35 in corporate tax — the second-highest such rate globally. Then, factoring in the looming 2013 tax hike, the remaining $65 would be subject to as much as another 43.4% tax rate.
Depending on each family's tax bracket, between $41 and $63 in taxes will be snatched out of that initial $100. Suddenly that investment makes much less sense for families, particularly seniors who make up a significant portion of the dividend-buying market.
Raising the capital gains and dividend tax rates doesn't make sense for businesses either. Globally, America is in an epic struggle for jobs and capital where certainty and competitiveness are foundations for success. The business community — already saddled by a complex and disincentivizing tax system — can ill-afford additional barriers to job creation, particularly as America's competitors become increasingly attractive as the world around us moves to lower tax rates.