President Joe Biden has proposed doubling the capital gains tax as part of his so-called “American Families Plan.” Under his proposal, the top federal capital gains tax will be 43.4 percent including a 39.6 percent long-term capital gains rate and the 3.8 percent Obamacare net investment income tax. Biden also calls for increasing taxes on carried interest capital gains.

Here are five reasons Biden’s capital gains tax should be rejected:

1. Biden’s Capital Gains Tax Hikes Will Harm the Economy

The capital gains tax is really a tax on investors and savers. Increasing the tax will increase the cost of capital, decreasing new investment. In turn, this will harm business creation, business expansion, and entrepreneurship, and threaten jobs and wages.

Capital gains taxes are imposed when a taxpayer sells an asset, such as stocks, bonds, or real estate. The tax is imposed on the difference between the purchase price, or cost basis, and the sale price.

Capital gains taxes create double taxation on corporate income as it is an additional layer of tax on business income. First, businesses pay the corporate income tax on their earnings. Second, the investor pays the capital gains tax on dividends received or stocks when they are sold. This double taxation discourages savings, suppresses productivity, and discourages investment. It acts as a barrier to job creation, wage growth, and economic growth.

2. Doubling the capital gains rate would make the United States less competitive

The combined state/federal capital gains rate in the U.S. is already higher than many competitors. The U.S. currently has a combined capital gains rate of over 29 percent inclusive of the 3.8 percent Obamacare tax and the 5.4 percent state average capital gains rate. Under Biden, this rate would approach 50 percent. This would give the U.S. a capital gains tax that is significantly higher than foreign competitors:

OECD Simple Average: 18.4% 

OECD Weighted Average: 23.2% 

China’s Capital Gains Rate: 20% 

United States Now: 29.2% (20% + 3.8% Obamacare tax + 5.4% state average) 

United States Under Joe Biden: 48.8% (39.6% + 3.8% Obamacare tax + 5.4% state average) 

Under Biden’s plan, taxpayers in California will pay a top capital gains tax rate of 56.7 percent (39.6% + 3.8% + 13.3% California state rate = 56.7%). New Yorkers will pay a top capital gains rate of 52.2%, while New Jersey taxpayers will pay a top capital gains tax rate of 54.14%. 

3. Biden’s Carried Interest Tax Hike Would Harm Savers across the Country

In addition to raising the capital gains tax, Biden would increase taxes on carried interest capital gains. Not only would this have the same negative impact as the capital gains tax increase, but it will also threaten the retirement savings of Americans across the country.

Carried interest is simply the tax treatment for investment made by private equity investors. Private equity is an investment class structured as a partnership agreement between an expert investor and individuals with capital.

Private equity seeks to invest in companies with growth potential and, as a result, has the potential to deliver strong returns. In fact, according to a recent study, private equity returned gains exceeding 15 percent over 10 years.

Because of these strong gains, private equity is a popular and reliable investment strategy for Americans across the country. The largest investor in private equity is public pension funds, which have collectively invested an estimated $150 billion in private equity. As noted by one study, 165 funds representing 20 million public sector workers have invested an average of 9 percent of their portfolios in private equity.

The financial security these returns provide to American savers including firefighters, teachers, and police officers will be threatened if lawmakers raise taxes on carried interest capital gains.

4. Biden’s capital gains tax hike could reduce revenues                

The capital gains tax creates a “lock-in” effect. Because the tax only applies when a taxpayer sells the asset, a high capital gains rate discourages individuals from selling in order to delay having to pay the tax.  

As noted by Lawrence Lindsey in a Wall Street Journal op-ed, raising the capital gains tax rate to 43.4 percent would make the cap gains rate significantly higher than the revenue-maximizing rate. The revenue-maximizing rate is the highest rate a tax can be before government starts losing revenue.

While there is dispute over what this rate is, there is broad agreement that it is significantly higher than Biden’s 43.4 percent. For instance, the Joint Committee on Taxation puts the revenue-maximizing capital gains rate at 28 percent, while others, including Lindsey argue it is 10 points lower, at around 18 percent.

Case in point – an analysis by the Penn Wharton Budget Model found that raising the capital gains tax rate to 43.4 percent in isolation would reduce federal revenues by $33 billion over the next decade.

Historically, when the capital gains tax was cut, revenue increased. When the capital gains tax is low, investment increases, stock prices increase, and revenue goes up. The inverse is of course true.  

In 1997, Congress cut the capital gains tax rate from 28 to 20 percent. Revenue estimators expected to collect $285 billion of capital gains tax revenue for fiscal years 1997-2000. However, tax revenues came in at $374 billion, 31 percent higher than revenue estimators suggested.  

Similarly, as part of a larger tax bill in 2003, the capital gains tax rate was reduced from 20 to 15 percent. In 2003, JCT/CBO anticipated the government would collect $327 billion of capital gains tax revenue over the next 5-years. However, the government collected $537 billion. Not only does this mean that tax revenues were “higher than expected,” but tax revenues exceeded the pre-tax cut forecast. During that time there was no loss to the Treasury.  

5. Democrats have recognized the damage caused by a high capital gains tax rate

In recent years, President Barack Obama and Senator Chuck Schumer railed raising the capital gains rate to the 43.4 percent rate proposed by Biden.

In a 2008 CNBC interview with Maria Bartiromo, President Obama said he opposed raising the capital gains tax to “confiscatory rates” which he defined as above 28 percent. As he noted:

“Here’s my belief, that we can’t go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was the 28 percent… My guess would be it would be significantly lower than that.” 

Similarly, in 2012, Senator Chuck Schumer (D-NY) rejected doubling the capital gains tax rate to 39.6 percent, the same rate that President Joe Biden is expected to soon propose. As Schumer noted: 

“Now, if you are returning the top income rate to Clinton-era levels, as I have proposed, I do think it is too much to treat capital gains the same as ordinary income,” Mr. Schumer said. “We don’t need a 39.6% rate on capital gains.”