[Congressional Record Volume 158, Number 161 (Thursday, December 13, 2012)]
[Senate]
[Pages S8025-S8026]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
CAPITAL GAINS TAXES
Mr. HATCH. Madam President, in less than 1 month, American taxpayers
face the greatest tax increase in our Nation's history. It did not have
to come to this.
The President claimed he wanted a balanced approach to deficit
reduction. He told the American people throughout his campaign we
needed to balance tax increases with spending cuts in order to tame our
deficits, stop taking on water and, of course, reduce our debt.
Many Republicans objected to this approach on empirical grounds.
There is no denying 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 halfway. They are
willing to concede some revenue increases in exchange for entitlement
reforms--revenue increases, not rate increases.
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, but 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 the 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 if 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 3 years, the preferential treatment for capital tax
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 taxes on capital
gains.
Two years ago, a study by the American Council for Capital Formation
showed that increasing the capital gains tax 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.
The fiscal cliff is only part of the story. In less than 1 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 the so-called Affordable Care
Act. As a result, the capital gains for upper income taxpayers is
already scheduled to increase by almost 4 percent. We should not add
another 5-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 that is only a jump from 15 percent to about 24 percent,
not that big a deal.
[[Page S8026]]
I would like to state just a few points. 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. 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 an agreement on cutting the top
rate on capital gains to 20 percent at that time. 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 5-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. This is said specifically
by the Senator who, along with Senator Lieberman, pushed very hard for
these lower capital gains rates. There was a Hatch-Lieberman bill that
was instrumental in bringing rates down to the current level.
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 on to 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 the 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 counters the
two levels of taxation of corporate income. A large amount of capital
gains arises 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 might 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 incentives
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.
So far I have only spoken about the coming increases in capital gains
taxes. I know people who are hurriedly selling their stock portfolios
now to pay the lesser capital gains rate and after the 1st of the year
will buy back the same stock, though it will have a higher basis at
that point.
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 onto that.
Many seniors depend on dividend income. 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. 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--excuse me--yes, it is 189 percent. I
thought for a minute it was 18.9 but, no, it is 189 percent.
It is hard to believe but nevertheless 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.
We are in the midst of a sluggish economic recovery. The President
and his allies in Congress seem bent on raising taxes, regardless of
the impact tax hikes will have on future economic growth or income
security of seniors and pension holders. They would have us believe
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--
among which is the Washington Post. I read the other day they are going
to do their dividends now before the end of the year, before all this
taxation occurs after the end of the year.
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 might add, I don't blame anybody for paying their dividends this
year--in advance of next year. I don't blame them at all. I certainly
don't blame the Washington Post for doing it. But if you think tax
policy doesn't affect how things are done in this country, then you
don't know what from what.
Let's just say I urge my colleagues to join me in supporting an
extension of the current capital gains and dividends tax rate.
The other day I talked about the estate taxes, or what we call death
taxes, and how stupid it is to do what the Democrats want to do with
regard to death taxes--make them so high so there is a double taxation
on families, and especially ranchers, which will go up 24 times the
number of last year's ranches and farms that will be hammered by these
higher death taxes.
There is a reason it is good to keep tax rates lower, and I hope none
of my colleagues on either side, really, but certainly on the
Republican side, will agree to raising tax rates because we know once
they are raised, our friends on the other side are just going to spend
that money. They will not use it to pay down this $16.4 trillion
national debt we have. We are a few bucks short of $400 billion in that
figure, but we are getting there. It will be $17 trillion before the
end of this year, and then it will go up even faster after that with
what the President plans to do to this country.
We have to wake up. We have to quit listening to the political talk,
and we have to start looking at the economics. We have to start looking
at what works in taxation and what doesn't. Frankly, we have a long
history of what works, and we also have a long history of what doesn't.
We are about to embark on all kinds of programs that don't. I don't
want to see that happen. I hope we will fight against these things. I
hope those who really do represent the people will start representing
them instead of just asking for more and more money so they can spend
more and more and get this country even more and more in debt.
Madam President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. ALEXANDER. Madam President, I ask unanimous consent the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
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