[Congressional Record (Bound Edition), Volume 158 (2012), Part 12]
[Senate]
[Pages 17104-17106]
[From the U.S. 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

[[Page 17105]]

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.
  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.

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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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