Arnott and Tamny: Lunacy of Raising Capital Gains Tax on the Economy and Innovation

KEVIN MCCARTHY'S VERY SWEET HOUSING DEAL WITH FRANK LUNTZ

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EXCERPT:

While it’s hard to imagine Silicon Valley’s remarkable dynamism evaporating as a consequence of higher capital gains taxes, increased penalties on investment will discourage riskier initiatives. This is crucial when we consider the high rate of failure among startups. Most fail, and none are sure things. Accordingly, it’s a safe bet that a higher capital gains rate ensures many great ideas will never attract capital and will die.  There’s a reason none of the FANG stocks -- Facebook, Amazon, Netflix, Google (Alphabet) -- were launched in Europe or Japan.    

Consider Elon Musk. He’s now worth about $200 billion.  If he decided to cash in his Tesla stock and move the money to a Mars venture, the feds would help themselves to $48 billion now, or $87 billion under Biden’s proposal, and a whopping $114 billion if he had remained in California. Imagine all the transformative ideas Musk could seed if politicians had shorter fingers.     

Economic growth is lubricated by the relentless movement of wealth to its best use. Assuming Biden’s tax vision becomes law, the cost of wealth migration will soon soar. The easiest way to avoid capital gains taxes is to leave your money wherever it is, rather than redeploying it to the next great idea. The result is that Biden’s tax plan will not raise additional tax revenues, but will subsidize stasis

All of this and more came to mind for us last week. A little more than 24 years ago, President Clinton signed into law a reduction in the capital gains tax from 28% to 20%. While the tax on capital gains should be zero to encourage innovation and risk-bearing, Clinton’s signature sent a positive signal that the “New Democrats” of his era well understood the importance of economic growth. How things have changed in the modern Democratic Party. Innovation will be the loser if Biden gets his way.      

Indeed, for those eager to create a better future with courageous investments, the cost of doing so will soar. Progress has always been expensive, but at a levy of 43% to 57%? Oh, well -- there will always be munis.    

Rob Arnott is founding chairman of Research Affiliates, LLC.

John Tamny is editor of RealClearMarkets, vice president at FreedomWorks, and author of the new book “When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason.”