U.S. Secretary of the Treasury Steve Mnuchin recently announced the Trump administration is considering reforming the federal capital gains tax structure. What is the capital gains tax? This tax, unlike income taxes, targets profits made from investments. For example, if you made a profit selling an investment such as a stock, bond, mutual fund, home, car, etc., you would pay a tax on the profit. Currently, capital gains tax rates fluctuate from 0 percent to 20 percent on long-term gains.
President Donald Trump and Mnuchin are not proposing a reduction in the capital gains tax rates. Rather, the administration is proposing that the capital gains tax be indexed to inflation. “Capital gains need special rules to ensure that savers do not get unfairly taxed on inflationary gains, which raises the effective tax rate and reduces investment,” according to Chris Edwards, director of tax policy studies at the Cato Institute.
Predictably, Democrats and liberal elitists have sounded the alarm over Trump’s plan. They claim that the tax reform’s benefits are miniscule and that the federal government would be stripped of much-needed revenue. However, both of these claims are undeniably false.
Despite the left’s baseless talking points, the proposal would actually benefit all Americans. For example, the reform would eliminate the incentive for investors to cling on to mediocre stocks. As Jason Clemens, Charles Lammam, and Matthew Lo of the Fraser Institute state, “One of the most significant economic effects is the incentive this creates for owners of capital to retain their current investments even if more profitable and productive opportunities are available.” This effect, known as the “lock-in effect,” directly impedes the economy by hampering buying and selling on the stock market. Under the current system, if a stockholder who has invested in a stagnant stock wants to sell and buy an alternative stock, he will be hesitant to do so because of the oppressive capital gains tax. The Trump plan would negate this by reducing the portion the investor would pay on the profits after it is adjusted for inflation.
Another good reason for this reform is that government revenue will likely increase because the economy will grow faster. Instead of taxing just the net profits realized from investment sales, the federal government is currently taxing net profits and inflation. In essence, this is akin to double taxation, one of the most unfair practices imaginable. Under the current scenario, investors are likely to limit the number of stocks they sell, thus giving the government fewer profits to tax. Under the existing method that capital gains taxes are enforced, both the investor and government are leaving a lot of money on the table.
Along with investors’ bank accounts and government coffers, employees also lose in the present capital gains tax structure. According to renowned author and economist Steven E. Landsburg, “More capital per worker means more output per worker, and more output per worker means more income per worker.” It makes common sense that a worker will be more prosperous if he and his company have access to the best materials, factories, and other forms of capital. More capital is only possible if investors are free to allocate their assets without being crippled by unnecessary and complicated taxes.
Furthermore, the claims that this change would give the wealthy a huge advantage over the rest of us or that U.S. government will incur a long-term revenue shortfall due to the proposed reform are both absurd. Currently, the U.S. capital gains tax rate is among the highest of all industrialized nations. In fact, only Denmark and France from the Organization for Economic Co-operation Development list of 34 developed countries had higher rates than the United States.
And although the U.S. Treasury will possibly experience a short-term reduction in capital gains tax receipts, over the long haul, the American economy will likely expand, increasing overall revenues. If implemented, Trump’s capital gains tax reform will likely reduce government deficits, while also benefiting American workers and investors. Trump was elected to drain the Swamp and unleash the American economy. Thankfully, he is well on his way to accomplishing these much-needed tasks.
Liam Sigler is a student commentator at Christendom College in Front Royal, Virginia.