Should the Buffett Rule Become Law?-CounterpointProponents argue that the added revenue would help the deficit and bring more fairness to the tax code.Rejecting this idea is tantamount to rejecting baseball, Berkshire Hathaway and apple pie.The reality is far different. Increasing the tax rate on all millionaires to 30% would not eliminate the deficit.IRS data shows that a10% surtax on those earning over a million dollars could raise $70 billion- a fractionof the overall funding gap of $1.2 trillion. To close this gap with taxes alone would require doubling taxrates for all taxpayers.For the wealthy a greater percentage of their income comes from investments in the stock and bondmarkets. Capital gains taxes are paid on investment income. Short-term capital gains are taxed atan ordinary income tax rate while long-term gains are taxed at a lower rate.The proposal unfairly targets these capital gains rates. In 2013 some tax cuts expire and new rules areset to raise capital gains rates. In 2008–2012 the tax rate on qualified dividends and long term gains was0% for lower tax brackets. After 2012 dividends will be taxed at the taxpayers ordinary income tax rate.The long-term capital gains rate will be increased to 20% for higher income taxpayers.The U.S. tax code is a morass of complex regulations. If we want a simple code we need a flat tax ratewith no deductions. Increasing capital gains taxes does not prevent sophisticated tax shelters involvingOlympic level dressage horses, real estate partnerships, or leveraged trusts.Increasing taxes on gains discourages investment at the time we need it most. Lower capital gains ratesmake new business ventures more attractive and help hold down capital costs. The higher the capitalgains tax, the more difficult it is for management to retain earnings for investment in productive projects.If the tax on potential capital gains is increased, either the pool of funds will be reduced or investors willhave to accept a lower rate of return. Entrepreneurs rely heavily on infusions of capital from both informaland formal sources. An increase in tax rates will reduce the pool of available funds.Net new job creation comes disproportionately from new companies. These companies carry higher risk,and therefore, the expected return to investors must be higher. Taxing returns decreases the pool ofavailable funds.Increasing employment and acceleration of economic growth is a top priority, so we need to understandthe impact of tax increases. Studies have generally found the following: Lower capital gains tax rates • Enhance economic growth Encourage entrepreneurship Benefit almost all taxpayers, since investments in capital assets are widely held not just by the wealthy but by those with 401Ks and pensions Higher capital gains tax rates • Cause a lower level of new venture funding: lower capital gains tax states saw increases in venture funding compared to higher capital gains tax states in the U.S. Higher capital gains taxes impact entrepreneurship decisions including “starting and expanding a business, obtaining financing; and whether and when an entrepreneur sells the business.” (Gentry, 2010)
Impede job creation. Higher capital gains tax states have lower employment growth while lower capital gains tax states have higher net job creation compared to states taxing capital gains as ordinary income.In short – increasing investment taxes is just plain bad for business.Sally Hamilton is a LeBow College Clinical Assistant Professor of Accounting at the Sacramento Centerfor Graduate Studies. She and her CPA spouse have paid taxes on capital gains and have survived twoIRS audits. Their effective tax rate over the last 4 years is 26%.