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Shock at Biden capital-gains tax plan looks staged

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A statue of George Washington stands across from the New York Stock Exchange in New York City, December 21, 2016. REUTERS/Andrew Kelly

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NEW YORK, April 23 (Reuters Breakingviews) - “I’m shocked, shocked to find that gambling is going on in here!” So exclaimed Captain Renault in “Casablanca” as he was handed his winnings. Some of America’s wealthiest people seem to be having the same reaction to proposals from President Joe Biden that would increase taxes on capital gains. Much of the purported shock looks as stagey as Renault’s.

Biden’s measures, designed to help pay for his ambitious infrastructure and child care plans, are due a formal airing next week. On the capital-gains front, for people earning over $1 million a year the tax rate would increase to 39.6% – in line with the proposed tax on regular income, but about double the current capital-gains levy.

Venture capitalist Tim Draper tweeted that Biden’s plan might “kill the golden goose that is America/Silicon Valley.” Jimmy Chang, investment chief at the Rockefeller Global Family Office, said it could “trigger an exodus” from stocks as investors lock in gains, according to Bloomberg.

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One theatrical element is that there’s any shock at all. Biden’s plans were part of his 2020 campaign and have been in plain sight for at least six months. Hence, perhaps, the absence of meaningful market moves alongside the fresh media attention on Thursday.

Another piece of stagecraft is the claim that the president’s plan is de facto bad for the U.S. economy or entrepreneurship. In October, even the conservative-leaning Tax Foundation concluded that the capital-gains part of Biden's package would only dent long-run GDP by 0.02%. And for what it’s worth, Microsoft (MSFT.O) was founded in 1975 when the top capital-gains rate was 36.5% and the top income tax rate was 70%.

Biden also plans to close glaring loopholes in capital gains on inherited wealth and so-called carried interest, the stakes in portfolio companies that private equity bigwigs collect for free, substituting for performance fees that would otherwise be taxed as income.

A plain-speaking plutocrat might concede that any purported shock is really about the hit to their personal investment income. This matters to the bigger picture because incentives change investment behavior. In the end, Biden may get none or only part of the tax-rate increases he wants. But booming markets have rewarded purveyors of capital handsomely and there’s little evidence the United States is near a tax-driven tipping point.

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CONTEXT NEWS

- U.S. President Joe Biden will roll out a plan to raise taxes on the wealthiest Americans, including a big increase in levies on investment gains, to fund about $1 trillion in childcare, universal pre-kindergarten education and paid leave for workers, sources familiar with the proposal told Reuters.

- The plan calls for increasing the top marginal income tax rate to 39.6% from 37%, the sources said this week. It would also nearly double taxes on capital gains to 39.6% for people earning more than $1 million a year. Details will be released next week before Biden’s scheduled address to Congress on April 28, according to Reuters sources.

- Any tax hikes would need to go through Congress, where Biden's Democratic Party holds narrow majorities and is unlikely to win support from Republicans. It is unclear if the package would have the unanimous backing of congressional Democrats, which would be essential in the Senate where each party holds 50 seats.

- Biden has promised not to raise taxes on households earning less than $400,000 a year.

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