The Dangers of Raising Taxes on Investment Income

May 1, 2012

In its fiscal year 2013 budget proposal, the Obama administration has proposed a series of tax law changes designed to raise more revenue from higher income earners.  Most crucial among these changes are the famed Buffett Rule, which would raise marginal rates on high-income earners, and increases in tax rates on capital gains and dividends earnings, says Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute.

The first policy proposal, the Buffett Rule, further increases the disproportionate tax burden that the nation's wealthy shoulder, while simultaneously doing little to close budget deficit gaps.

  • According to the Joint Tax Committee, the rule will raise only $47 billion over the next decade.
  • While this is a substantial sum in absolute terms, this revenue augmentation is only a small fraction of the projected deficits for that period, which the Committee places at $6.7 trillion.
  • Ironically, the Buffett Rule would not affect the taxes paid by Warren Buffett, whose unique placement as a shareholder in an insurance company would make him immune to the policy.

The second set of policies, which would have the total effect of further taxing investments in American companies, is harmful to American firms and investors alike.

  • Long-term capital gains tax rates would rise from 15 percent to 20 percent.
  • The tax rate on income from corporate dividends would rise from 15 percent to a top rate comparable to that of the highest "ordinary" income bracket.
  • These tax rates are significantly higher than rates abroad -- this would cause substantial amounts of investment to move overseas.
  • Other investors would simply avoid the tax hikes altogether by timing their investments such that they do not mature during the life of the higher tax rates.
  • Finally, the failure to index such taxes against inflation will further exacerbate potential financiers concerns regarding the risks of investment.

This second rule will have the overall effect of reducing the amount of capital available to American firms, thereby increasing their borrowing costs.  This will prove harmful to an already-fragile jobs market.

Source: Diana Furchtgott-Roth, "The Dangers of Raising Taxes on Investment Income," Manhattan Institute, April 2012.

For text:

http://www.manhattan-institute.org/pdf/ir_5.pdf

 

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