Hatch Outlines Impact of President’s Tax Hike Plan on Retirees, Investment
In Speech On Senate Floor Utah Senator Says, “The President And His Allies Here In Congress Seem Bent On Raising Taxes Regardless Of The Impact The Tax Hikes Will Have On Future Economic Growth Or Income Security Of Seniors And Pension Holders.”
WASHINGTON – As the President continues to push his $1.4 trillion tax hike plan, U.S. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance Committee, outlined the impact on the millions of Americans, including small business owners and retirees, who rely on investment income.
“We are in the midst of a sluggish economic recovery. The President and his allies here in Congress seem bent on raising taxes regardless of the impact the tax hikes will have on future economic growth or income security of seniors and pension holders,” said Hatch, in a speech on the Senate floor. “They would have you believe that there is no relationship between tax rates and economic growth. If that were true, we wouldn’t be seeing major companies scurrying to grant big dividends now, before the year ends and taxes potentially skyrocket.”
Hatch continued, “The coming capital gains tax hike is just one of many tax hikes facing the American people if Congress refuses to act before the end of the year. I think the numbers make a pretty compelling case that raising the capital gains tax rate — particularly when ObamaCare will already raise that rate by nearly 4 percent — will do serious damage to our economy.”
Unless the President works with Congress to avert the fiscal cliff, the top tax rate on dividends will nearly triple from 15 percent to 43.4 percent. That’s a tax increase of 189 percent. The top capital gains rate will rise from 15 percent to 23.8 percent – a massive 59 percent increase.
According to a February 2012 Ernst & Young Study, after taking into account corporate, investor (with the President’s proposed increase), and state taxes, the top rate on dividends will rise to 68.6 percent on January 1, 2013, which is the highest in the world among the Organization for Economic Co-operation and Development (OECD) and BRIC (Brazil, Russia, India, and China) countries.
Similarly, that same study shows taking these same taxes into account, the top rate on capital gains will rise to 56.7 percent on January 1, 2013, making it the second highest in the world among OECD and BRIC countries.
Below is the text of Hatch’s full speech delivered on the Senate floor today:
Mr. President, in less than a month, American taxpayers face the greatest tax increase in our nation’s history.
It did not have to come to this.
The President claimed that he wanted a balanced approach to deficit reduction. He told the American people throughout the campaign that we needed to balance tax increases with spending cuts, in order to tame our deficits, stop taking on water, and reduce our debt.
Many Republicans objected to this approach on empirical grounds. There is no denying that the principal source of our debt crisis is on the spending side.
But elections have consequences, and many Republicans have now stated a willingness to meet the President half way.
They are willing to concede some revenue increases in exchange for entitlement spending reforms.
But the President now says never mind all those campaign promises about a balanced approach.
He has taken nearly all meaningful entitlement reforms — including many he previously endorsed — off the table.
He has abandoned revenue increases and spending cuts for deficit reduction, and replaced that balanced approach with a plan to raise taxes and increase spending.
This is not what he told the American people he stood for.
I would go so far as to say that if he did campaign on this, he would now be looking for new employment.
This bait and switch is beyond cynical, particularly when he knows that Republicans have a strong and empirically grounded opposition to revenue increases.
So far, we have focused primarily on the economic impact of the increased marginal tax rates the President is demanding.
But it would be wrong to discount the coming tax increase on individual capital gains, should we go over the cliff or the President gets his way.
The evidence seems clear.
Any capital gains tax increase is counterproductive to real economic growth and job creation.
Allowing these rates to go up puts ideology, partisanship, and class warfare ahead of sound economic and tax policy.
For almost the entire history of our income tax system, we have had preferential tax treatment for capital gains.
From 1921 through 1987 — and then again after 1990 — long-term capital gains have been taxed at a lower rate than ordinary income. The short time — approximately three years — that the preferential tax treatment for capital gains was not in effect was due to the Tax Reform Act of 1986.
The 1986 Act is considered by many to be the gold standard for tax reform, and elimination of the preferential tax treatment for capital gains is considered by many to be one of the major accomplishments of the 1986 Act.
It is important to recall, however, that elimination of preferential tax treatment for capital gains in 1986 was coupled with a significant reduction in tax rates for individuals.
And the lack of preferential treatment did not last long.
Today, the top tax rate on capital gains is 15 percent. If Congress fails to act and we go over the fiscal cliff, the tax rate on capital gains will increase to 20 percent on January 1, 2013.
In today’s fragile economy, with unemployment still hovering around 8 percent, we should not be raising tax rates on capital gains.
Two years ago, a study by the American Council for Capital Formation showed that increasing the capital gains tax rate would cause measurable damage to the economy.
The study estimated that if the capital gains tax was increased to 20 percent from 15 percent, real economic growth would fall by 0.05 percentage points per year and jobs would decline by about 231,000 per year.
If the rate is increased to 28 percent, real economic growth declines by 0.1 percentage points per year and 602,000 fewer jobs are created each year.
And the fiscal cliff is only part of the story. In less than a month, a new 3.8 percent tax on net investment income of single taxpayers earning more than $200,000 and married couples earning more than $250,000 will go into effect as part of PPACA. As a result, the tax rate on capital gains for upper-income taxpayers is already scheduled to increase by almost 4 percent.
We should not add another five percentage point tax increase on top of that.
Upper-income taxpayers will face a 23.8 percent tax on capital gains in 2013 if Congress fails to act to prevent a rise in the capital gains tax.
Sometimes the magnitude of these numbers is lost on folks. They might think, well that is only a jump from 15 percent to about 24 percent. Not that big a deal. Just a few points.
But that represents a 59 percent increase from current law!
During the fiscal cliff negotiations, some have posited that all that is at stake is a return to the tax rates of the Clinton era. But that is not what is happening with the tax rate on capital gains.
During the latter part of the Clinton-era, a Republican majority in Congress was able to get agreement on cutting the top tax rate on capital gains to 20 percent. If the tax rate on capital gains remains at the 2012 rate of 15 percent — coupled with the new 3.8 percent tax on net investment income — capital gains will be taxed at 18.8 percent, very close to the Clinton-era rate.
A five percent increase in the tax on capital gains to 20 percent — coupled with the increases imposed by ObamaCare — will result in a rate of 23.8 percent, well above the tax rate on capital gains at the end of the 1990s.
We should not go down this road. There are a number of arguments on behalf of preferential tax treatment for capital gains.
For example, there is the lock-in effect. Since capital gains are only taken into account when realized by a sale or exchange, investors can avoid paying the capital gains tax by simply holding onto their capital assets. As a result, the capital gains tax has a lock-in effect, which reduces the liquidity of assets and discourages taxpayers from switching from one investment to another. This impedes capital flows to their most highly-valued uses and is, therefore, a source of economic inefficiency.
The higher the rate, the greater the disincentive to make new investments.
The preferential tax treatment for capital gains also counteracts the two levels of taxation of corporate income. A large percentage of capital gains arise from the sale of corporate stock. When a corporation earns income, it pays taxes on that income. When a shareholder sells stock, part of the gain on the stock may be due to the earnings of the corporation resulting in a double tax of corporate earnings. A low capital gains tax leads to increases in savings and investment, corrects the income tax law’s bias against savings, corrects the lack of indexing capital gains for inflation, and increases the incentive for risk-taking.
The tax rate on capital gains can also be viewed as a compromise between an income tax system and a consumption tax system.
In a pure income tax system, capital gains would be taxed the same as any other type of income.
In a consumption tax system, capital gains would not be taxed at all. Taxing capital gains at 15 percent can be seen as a reasonable compromise of income tax and consumption tax principles.
An increase in the capital gains tax rate will increase the difference between what an investment yields and what an individual investor actually receives. This is known as the tax wedge. The higher the tax wedge, the fewer the number of investments that will meet the minimum rate of return required by an investor — known as the hurdle rate.
In short, higher rates equal fewer investments. And fewer investments means fewer jobs. And so far I have only spoken about the coming increases in capital gains taxes. The impact of the fiscal cliff on the taxation of dividends is even more severe. Unless Congress acts, dividends will be taxed at a rate as high as 43.4 percent come January 1.
This is because, starting in 2013, dividends will be taxed at 39.6 percent under current law, and then the ObamaCare surcharge of 3.8 percent will be tacked on.
Many seniors depend on dividend income, and to increase their dividend income taxes to around 40 percent — especially at a time when any bonds they hold essentially yield nothing — hollows out the nest eggs of retirees. And unless we address the fiscal cliff, the taxation of dividends will go from 15 percent to 43.4 percent literally overnight. This is a tax increase of 189 percent.
It is hard to believe, but nonetheless true, that many Democrats — including the President’s Treasury Secretary — have expressed a willingness to go over the fiscal cliff, when Americans are facing tax increases of this magnitude.
Mr. President, we are in the midst of a sluggish economic recovery. The President and his allies here in Congress seem bent on raising taxes regardless of the impact the tax hikes will have on future economic growth or income security of seniors and pension holders.
They would have you believe that there is no relationship between tax rates and economic growth. If that were true, we wouldn’t be seeing major companies scurrying to grant big dividends now, before the year ends and taxes potentially skyrocket.
The coming capital gains tax hike is just one of many tax hikes facing the American people if Congress refuses to act before the end of the year. I think the numbers make a pretty compelling case that raising the capital gains tax rate — particularly when ObamaCare will already raise that rate by nearly 4 percent — will do serious damage to our economy.
I urge my colleagues to join me in supporting an extension of the current capital gains and dividends tax rate. Mr. President, I yield the floor.