A Pox on Retroactive Taxes
8th June 2021
… large governments are often hard-pressed to fund their ambitious spending programs. And so the Biden administration proposes to increase the capital-gains top rate from 23.8 percent to 43.4 percent to pay for its $6 trillion American Families Plan, which includes about $1.8 trillion for child care, education, and paid employee leave. But as its Treasury Report makes clear, it fears that the steep capital-gains rate increase will induce massive selling before the effective date of the statute in 2022. It, therefore, proposes an unprecedented step of imposing the higher capital-gains rate on any transaction that took place after late April, when that tax hike was first proposed.
But Treasury misfires badly. Sales of capital assets are good for the economy because they allow individuals to shift from weaker to stronger investments. The inefficiency comes from forcing premature transfers. Yet the massive rate increase proves that high rates, even when applied on a prospective basis, will distort the allocation of capital, depress overall share prices, and ensure that the new tax will fall short of its revenue goals, which are better achieved through durable tax cuts. But the Biden administration plainly ignores these drawbacks for long-term wealth creation in its relentless request for revenue today.