Taxes on Wealthy lead to Pain for All

"Soak the rich" is a favorite battle cry for politicians seeking reelection and advocates of social justice, but in the end, it creates injustice for all. This will clearly be seen as a consequence of the recent health care bill, as well as with the President's ambitious efforts to dramatically increase the tax on capital gains.

Numerous major corporations have announced projected loses in the hundreds of millions of dollars due to Obamacare. These tax hikes will have an adverse effect on the capital stock and will undermine job creation among small businesses. You would think the Obama administration, which is presiding over the worse unemployment this nation has seen in over a generation, would do everything in its power to keep unemployment down. To look at the obvious consequences of Obamacare, however, one would think that increased job losses is a policy objective. But the damage does not end with the President's ambitious health care agenda, but is also seen in his desire to change the taxes on capital gains.

Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis, notes that:
The 2001 Bush tax cuts reduced the lowest marginal income tax rate from 15 percent to 10 percent and the highest from 39.6 percent to 35 percent. This tax situation led to a job creation environment that was one of the best in recent history and brought the US unemployment down to around 5 percent. Simply put, the cost of using an asset got smaller and the profit got higher. This led to business activity taking place that resulted in more jobs and more tax revenue (because revenue comes from business activities that take place, like the selling of assets).
President Obama proposes to raise the two top marginal rates to 36 and 39.6 percent beginning in 2011 for the highest-income earners while leaving the other tax brackets unchanged. This will be temporary, however and will be followed with additional changes in the brackets and the amount taxed.

Starting in 2013, Obamacare will impose an additional 0.9 percent Medicare tax on wage income for individuals earning more than $200,000 a year and couples earning more than $250,000.
To make matters worse, the new law imposes a 3.8 percent Medicare tax on unearned income, such as "rent, royalties, dividends and capital gains for the same high-income earners."
The Obama administration also wants to increase long-term capital gains tax rates from 15 percent this year to 20 percent in 2011 for the two highest tax brackets, and taxing dividends at ordinary income tax rates for those earning $200,000 a year or more.

So what kind of impact will this have on the most affluent? Villarreal suggests we should "suppose an individual owns $50,000 worth of stock that has accumulated an 8 percent capital gain and 3 percent dividend after one year:"

• By 2013, the tax on the $4,000 gain (just after one year) would be as much as $1,309, compared to $825 if we simply left taxes at the current rate.
• With the current tax rate on capital gains (15 percent), the tax on the sale of $50,000 in stock would be $825, and the after-tax rate of return would be 9.35 percent.
• If President Obama's proposed capital gains and dividends increases of 20 percent go into effect, along with the excessive new taxes that will come with Medicare, the tax bill rises to $1,352 and the after-tax rate of return falls to 8.38 percent (a drop of almost 1 percent).
• For ordinary dividends, a higher marginal tax rate and the new Medicare taxes could nearly double the individual's effective tax rate from 15 percent to more than 29 percent, essentially doubling the tax burden.

The US already has the unwelcome distinction of having one of the highest tax rates of any industrialized country in the world. After Obama's pro-tax, anti-prosperity, agenda, we will likely be the world's number one tax collector among modern countries. For those who are more affluent, this will result in an after tax rate of return on this type of investment that would have the return on the profit be reduced by approximately 10 percent. The ironic result of such is that increasing the capital gains tax could actually lower government tax revenues (as witnessed in the past), because people will hold on to assets in order to avoid the tax. Remember, unlike the vast majority of people who sell things because they need to move, or they need a different vehicle, or there is some other cost driving necessity, the rich simply sit on the asset and wait until the tax environment changes. They can afford to do that and it is in their self interest. For much of the country, however, it leads to the depletion of jobs and even the hope of jobs.

Instead of increasing taxes on wealth creation (e.g., capital gains, taxes on businesses, etc.), this administration should consider dramatically reducing such barriers between people and jobs.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is also host of the Price of Business (M-F at 11 AM on CNN radio). Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Are You Ready For "Estaticide"?

I first thought of this idea while on the Steve Stockman Show in Houston, Texas and recently found myself discussing it with my friend on the Wall Street Journal Editorial Board, Steve Moore. The concept is "Estaticide." Estaticide is the extermination of individuals because of how punishing the tax implications.

This possible phenomenon is spurred on by the best of intentions. In 2001, President Bush wanted to provide relief to families that are devastated by the death of a family member. It is bad enough that mom or dad have passed away, without picking their pockets in the process. This led to the creation of the Taxpayer Relief Act of 2001 (which modified a similar act in 1997). This law would lead to a gradual increase in the tax credits associated with estate taxes and a reduction in the maximum rate until 2010 in which the tax would be repealed. The bad news is that the rate would go back to 2002 levels in 2011. That means the rate would go from zero to a maximum rate of 50 percent in one year.

Steve Moore, at a recent RightOnline.com event, pointed out that it would literally make this jump over night from New Years Eve 2010 to the new 2011. In his speech, he paints a morbid picture. You can see a family surrounding a dying love one in December 2009. Loved ones knowing he will pass away, but praying he makes it to January 1 when the maximum rate plummets from 45 percent to zero. Fast forward to one year later and you find a different family whose patriarch is on the death bed with hours being left before the tax rate goes from zero, back to 50 percent and without the credits. You can see them surrounding the bed and looking at their watches.

This leads to the concern about "estaticide." People mysteriously passing just before the tax laws change. Stranger things have happened. A better thing that could happen is if lawmakers would put an end to the insanity of severely penalizing people for dying once and for all. People work hard to provide for their families for both now and for future generations. It is one of the drivers that make people work harder and economies productive.

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Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.