Biden’s capital gains taxes would boost economic equality: Analysis

An assessment of the Biden administration’s tax proposals on increasing capital gains taxes has found that they would reduce wealth inequality without harming economic growth.

The study from American University looked at Biden’s budget plan to increase the tax rate on dividends and capital gains from 20 percent to 39.6 percent and concluded that only the richest Americans would see a decline in their wealth due to the bump.

Meanwhile, gross domestic product would increase over the long run as a result of the tax bump due to indirectly increased investment related to a reduced return on equity, the researchers found.

“We know that capital gains have increased a lot in the last few decades, and we know that this has contributed a lot to wealth inequality,” Ignacio González, the lead author of the study, told The Hill.

Increased taxes on stock market returns such as dividends would create a more equal economy because stocks are owned mostly by wealthy people, the study argued.

The top 1 percent of the U.S. wealth distribution owns about half of the stock market, while the bottom half of households own just 1 percent of stocks, the authors noted, citing research published by the University of Chicago. Only about 20 percent of U.S. households make money from interest, dividends or rental property income, according to data from the Census Bureau.

Wealth inequality has skyrocketed in recent decades as a result of longer-term changes in U.S. economic policies, a phenomenon that has been well-documented in academic and government research, along with copious economic reportage.

“The difference in wealth held by families at the 90th percentile and the wealth of those in the middle widened from $532,000 to $861,000 over the period [from 1989 to 2013],” researchers with the Congressional Budget Office wrote in 2016.

Wealth shares held by households in the top 10 percent of the distribution jumped from 67 percent to 76 percent over that period, while the share of wealth held by households in the bottom half of the distribution fell from 3 percent to 1 percent, they found.

Industries have also become more concentrated within that time frame, with an increasing number of economic sectors controlled by just a few giant companies. The economic model used by the American University study accounts for the increased private sector market power — the ability of firms to raise prices above costs — resulting from this higher degree of concentration.

While income tax rates increase along with income levels, taxes on capital gains are treated separately, which contributes to a different overall structure for the tax code than what is suggested by the income tax alone.

“Considered as a whole, today’s tax system resembles a flat tax, even becoming regressive at the highest income levels,” González and his co-authors wrote.

Biden and Congress enacted a 1-percent tax on stock buybacks as part of the 2022 Inflation Reduction Act. The administration is currently seeking to quadruple that tax in a bid to get the wealthier Americans to contribute more to public coffers.

The dividend and capital gains rate proposals “primarily alter the valuation of stock market wealth, leaving the economy’s long-run productive capacity unaffected,” the authors of the study argue.

Not everyone is convinced by the argument.

“In their model, increasing the capital gains tax reduces the cost of capital, and I think there’s good reason to be skeptical of that mechanism,” Erica York, an economist with the Tax Foundation, told The Hill.

“The findings of the study heavily depend on the unrealistic assumption that capital gains realizations do not change in response to a higher tax rate,” she added.

The relationship between capital gains taxes and growth in the economy is a common concern among politicians and economists, but it’s not clearly defined, as periods of much more robust growth have coincided with higher capital gains tax rates.

“Traditionally, proposals to lower taxes on corporate distributions have been based on the assumption that such reductions stimulate corporate investment and foster economic growth. However, since taxes on corporate distributions are levied on profits after investment, they in fact have little influence on firms’ investment decisions,” González wrote.

More at stake in the debate over how to tax capital gains than economic performance is the issue of perceived fairness in the economy, which researchers have long paid attention to.

“Income from capital is only a quarter of all income. Yet the taxation of capital income is at the center of some of the most long-standing and spirited debates about federal income tax policy,” Congressional Research Service economist Jane Gravelle wrote in a 1994 book on the subject.

“Capital income taxes are … viewed as having important implications for fairness,” she wrote.