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Which is the ideal tax rate for capital gains? The American Dilemma

In the USA, Republicans and Democrats have two different approaches to the level of taxes that should be applied to capital gains. Historically, it is possible to see that when the president represents the Democratic Party, the capital gains tax usually increases, while the opposite happens when a Republican is on the power. A good example is the decrease of the capital gains tax rate in the Bush Administration in 2003 from 20% to 15% (an historical minimum since 1920).

On one hand, the Democrats believe that if the capital gains tax rate is put at a higher level than the usual income tax that it will be a way to decrease inequality between high-income and low-income households and tax revenues will increase. On the other hand, Republicans believe that if the capital gain tax rate is low, it will foster economic growth by turning the USA in a more competitive and attractive country to invest in and as a consequence more jobs will be available in the economy.

Although both views have its advantages and disadvantages in an economic point of view, I’m taking the Republican side regarding this subject. The Democrats defend that if the tax rate is low, only the high-income households will benefit and inequality will even increase more but if this is the case, investors will not be willing to invest and as a consequence growth won’t exist. Such as tax can be seen as a tax on future consumption, if the dividends of an investment are taxed it can be seen as a tax on savings. Such a tax will lead to lower savings, discourage future investment and harm growth.

Inequalities created by globalization and/or different education levels will not be mitigated by high capital tax rates. I see such a raise being even more harmful to the low-income households, because they will be the ones to pay for the low level of investment by foreign firms and will suffer more as a consequence of the lower economic growth. Of course it has to be taken into account that “this time is different” and the approach to this subject has to be made very carefully and such important measures must be well thought.

Renato Poirier

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Author: studentnovasbe

Master student in Nova Sbe

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