Raising the Capital Gains Tax Would Be Un-American

(Bloomberg Opinion) -- President Joe Biden’s proposal to nearly double the tax rate on capital gains has led to a reexamination of a long-running economic debate. This discussion can get bogged down in technicalities and miss the main point: First and foremost, any system of taxation is about values. And a much higher rate of capital taxation would undermine some of America’s core values.

A society’s values and its tax regime have to be mutually compatible or they will undermine each other. So the first question about a taxation system is which values it promotes.

The values that the U.S. should prioritize are a valorization of wealth, the encouragement of saving, and the encouragement of children. People may disagree with these priorities — in fact, they disagree quite strenuously! — but for me, it’s important to know whether a proposed tax reform supports or weakens these values. This is a more important consideration than economic calculations of “deadweight loss.”

Under the Biden proposal, the capital gains tax on wealthy individuals would rise to 43.4%, which would mean net rates well over 50% for individuals in high-tax states such as California and New York. Overall, that change would send the message that the U.S. is not such a great place to accumulate and cash in wealth. As a result, America would lose some of its cultural and economic vitality.

For such a big increase in the capital gains rate to be sustainable and thus effective, American values would have to shift — permanently so. That is exactly the scenario to be avoided.

Values are all the more important for taxation because America is a nation of immigrants. Which is the better message to potential new arrivals? Should it be “America is a great country to get really rich”? Or “Americans are pretty egalitarian, so they won’t let the wealthy get too rich”?

The first message is far preferable — and this is true even if you personally hold fairness to be an important value. It is more important to encourage ambition in those newly arrived to the U.S., if only to take in creative (and yes, sometimes greedy) people who will help solve America’s social problems. Immigrants are responsible for so many of this country’s best and most successful startups.

It’s not that immigrants read the tax code before making their migration decisions. But they do have a sense of the core attitudes of a nation toward savings, investment and wealth, as do native-born Americans.

The fact that the U.S. is the innovation capital of the world makes it all the more important to promote the values of ambition and wealth accumulation. Those values are associated with the entrepreneurs who are likely to create products that will scale and spread, helping to raise living standards around the world. That is itself a way of expanding and encouraging global fairness even if income inequality rises at home.

To be clear, not every country, or even most countries, should choose the same values and tax systems as those of the U.S. If New Zealand has a much more egalitarian ethic, and corresponding policies, that may well be appropriate. (That said, even New Zealand does not resort to general capital gains taxation at all.)

It may well be true that the U.S. has more efficient ways of encouraging ambition and wealth accumulation than the current approach to capital gains taxation. But to make that argument, advocates of the higher capital gains rate need to say what else they would do to boost the valorization of American wealth. Somehow, however, such explanations are never forthcoming — because this debate really is about a clash of values, not just efficiency, and one side wants to lower the status of accumulated wealth.

Only a few weeks ago, the prevailing opinion was that it was fine for the federal government to spend an additional $1.9 trillion, because at current margins, deficits don’t matter. Maybe so. But that nonchalance is now mysteriously absent. That too is a sign that, for most people, the values represented by any decision about taxation are paramount.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "Big Business: A Love Letter to an American Anti-Hero."

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