Just when you thought that the Democrat Congress couldn't do a worse job getting the economy back on track, this week the U.S. House will be serving up two new marginal rate tax hikes, according to published reports:
The first is a capital gains tax hike on investment partnership managers. Typically, managers of investment partnerships have a contractual right to 20 percent of the profits they make for the partnership. These profits are capital gains, and are taxed as such. Reports indicate that the House wants to raise the tax rate for these capital gains from today's 15 percent all the way up to 43.4 percent–nearly a 300 percent increase! I'll have more on the implications of this later in the week. As a sneak preview, let's just say that the investment managers should be doing just fine, but those who invest with them (defined benefit pension plans, charitable trusts, and universities, mostly) won't be.
The second marginal tax rate hike is on Subchapter S-corporations. These businesses are structured so that business profits are paid by the owners on their individual tax forms. The House bill would add another layer of taxes to these profits–namely the (soon to be) 3.8 percent Medicare tax. As a result, the top rate on S-corporations will rise from 35 percent today to 43.4 percent. This means less capital available to invest in plant and equipment, create jobs, etc.
Needless to say, marginal income tax rate hikes are singularly-stupid. They are especially dumb when all they are being used for is to pay for the tax code we already have. But that's what's on deck this week.