There are even people who believe they should hold on to their assets rather then sell them when the country is characterized by a high capital gains tax.
Harry Wallop Consumer Affairs Editor writes on the repercussions,
“The institute studied America, where the rate has changed substantially – both up and down – since the 1950s. It calculated that a tax increase of 10 percentage points led to a 21 per cent reduction in revenues. On another occasion an increase of 8 percentage points led to a 15 per cent fall in tax revenues. “
This statistic helps illuminate the fact that there is a fine line when it comes to capital gains rates. If the rate is to high, people will simply hold on to their assets and a substantial amount of revenue will not be collected.
A major concern in the current economic climate is that high capital gains taxes will erode business growth. Newt Gingrich and Emily Renwick Write in The American, “The capital gains tax is an unequivocal burden on the capital we need to grow, prosper, and compete in a 21st century global economy. Any American or business that sees an appreciation of the value of their income (capital) must pay up to 39.6 percent in additional taxes on this appreciation (depending on the length of the investment and the marginal tax rate of the individual or business). Considering inflation, the effective rate paid on investments is even higher. As we are coming out of the recession, the United States should do everything within its power to create a financial environment that allows businesses to rapidly grow and prosper.”
As Newt Gingrich points out the fact that we are in an economic recession and anything that hinders corporate flexibility and innovation will inevitably undermine the prospect of long-term growth.
Additionally capital gains taxes are viewed as an obstacle to retirement. Many seniors are relying on the value of their stocks in retirement savings plans.
President Obama’s “Budget Blueprint” proposes to raise the tax rate on dividends and capital gains from 15 percent to 20 percent. This tax hike would hit senior citizens particularly hard, as it would depress the value of stocks held in many types of retirement savings plans they rely on for income to supplement their Social Security benefits. These plans include 401(k)s, 403(b)s, IRAs, and self-directed state, local, and federal government employee retirement funds. As of December 31, 2008, these plans invested $4.4 trillion in stocks–just over of 54 percent of all their assets.” The perception is that an increase in capital gains taxes reduces the market value of stocks.
Retirement prospects have already been curtailed so much with the housing market and lackluster stock market. Taxing revenue used by senior citizens as a means to retire is only furthering the retirement crisis in the United States.
While these are all issues that are associated with incredibly high capital gains taxes, it is difficult to claim that the capital gains policy in the United States is unreasonable.
In the United Kingdom as recent as this May, the government was discussing raising the capital gains tax to 40%. This created a huge scare with property owners however the government made concessions and the capital gains tax ended up being relatively modest. Kevin Brass of The Real Estate Channel writes on the concession, “ Instead the new budget calls for a relatively rational raise in the capital gains tax from 18 percent to 28 percent. And the rate will only affect higher tax brackets, not middle income earners.”
Harry Wallop Consumer Affairs Editor writes,
“If England had hiked the rate up to 40% it would have the highest tax rate in the developed world. Of the 30 leading countries that are members of the Organization for Economic Co-operation and Development, not one has a rate higher than 30 per cent, if citizens have held on to their assets for at least three years.
The average rate is just 15 per cent, with many countries not levying the tax at all. “
A shift from 15 % to 20% is not that dramatic. Only time will tell if it will cause the perceived social harms that high capital gains taxes generally cause happen with the upcoming tax changes.