A lot of attention has been focused on this, as people react to Mitt Romney’s low tax rate without understanding the issue of income tax rates on earned income and on capital gains. And with the President’s proposed budget, he calls for increases in the tax rates on both capital gains and dividends. This article explains the issue much better and more thoroughly than I can, so I link it and post a few excerpts. Look closely at the two charts – when you fully factor in all the taxes, we already have some of the highest tax rates in the developed world. My experience has shown me that businesses seek low-tax states and countries to operate in; how can we become more competitive with other countries when we tax more than just about everyone else? If you raise the tax rates, don’t be surprised by outsourcing and offshoring.
Most of the discussion is focusing on the big increase in tax rates for 2013, particularly when you include the 3.8 tax on investment income that was part of Obamacare. If the President is successful, the tax on capital gains will climb from 15 percent this year to 23.8 percent next year, and the tax on dividends will skyrocket from 15 percent to 43.4 percent.
But these numbers understate the true burden because they don’t include the impact of double taxation, which exists when the government cycles some income through the tax code more than one time. As this chart illustrates, this means a much higher tax burden on income that is saved and invested.
The accounting firm of Ernst and Young just produced a report looking at actual tax rates on capital gains and dividends, once other layers of tax are included. The results are very sobering. The United States already has one of the most punitive tax regimes for saving and investment.
Looking at this first chart, it seems quite certain that we would have the worst system for dividends if Obama’s budget is enacted.
The good news, so to speak, is that we probably wouldn’t have the worst capital gains tax system if the President’s plan is enacted. I’m just guessing, but it looks like Italy (gee, what a role model) would still be higher.
Let’s now contemplate the potential impact of the President’s tax plan. I am dumbfounded that anybody could look at these charts and decide that America will be in better shape with higher tax rates on dividends and capital gains.
This isn’t just some abstract issue about competitiveness. As I explain in this video, every single economic theory — even Marxism and socialism — agrees that saving and investment are key for long-run growth and higher living standards.