President Joe Biden has touted his “Invest in America” theme across the country.
He’s right that investing in factories, pipelines, research and development, start-ups, and technology is the corn kernel of a growing economy.
Investment is essential to future prosperity and raises the wages of American workers.
The private sector accounts for about 80% of all investment in America, and every year private investors put about $4.5 trillion at risk to advance new businesses and technologies.
So if this is an investment Biden wants, why does his new tax plan include what could be the biggest investment tax penalty in American history?
If you don’t believe me, let’s run through the math; the nonpartisan Tax Foundation verified these numbers.
Let’s say you’re a multi-millionaire who decides to invest $1 million in a biomedical research startup that has a promising treatment for Parkinson’s disease.
Remember, this is venture capital. An investor is more likely to lose the million dollars than to get the expected big return.
But let’s say you pick a winner and over 10 years you’ve made $1 million in profits on paper.
The first thing that happens, before you see profits, is that the business pays corporation tax.
Biden wants to raise that figure to 28% after all authorized expenses. The company pays $280,000 to the federal government, and that million dollars in profit shrinks to $720,000.
Now let’s say you sell the stock. Biden wants to raise capital gains tax to around 44.6% for millionaires, up from 23.8% today.
It would tax capital gains at the personal income tax rate of 39.6% and, for millionaires, add an additional 5% “net investment income tax”.
So you pay about $320,000 in tax on the capped gains. Remember that if you lost money on other stocks you own, you are limited in how much you can deduct from the gain you made on that company.
The taxman has set up a rigged system: you win heads, so the government receives 42% of your profits; stack you lose all your money.
Adding the corporation tax and capital gains tax on the $1 million profit, your actual tax owed is just over $600,000, or a tax rate of 60%.
The tax is roughly similar whether you take your profits through dividends or keep the shares — because Biden wants to tax stock gains whether you sold them or not.
But wait. It’s not really total tax because, remember, capital gains are not indexed to inflation.
Over the past year, inflation has hit 6%, but let’s say Biden and the Federal Reserve reduce the inflation rate to 3% over the next decade.
Over the 10 years you’ve held the stock, your return after inflation is not $1 million, but $774,000.
So you’re actually paying $600,000 in tax on $774,000 of income after inflation—for a tax rate of 77%.
This means that for every $4 of profit you make investing in the business, $3 goes to the tax collector and you keep $1.
This is almost confiscatory and even higher than the 70% tax rate that Senator Bernie Sanders aspires to. Who would invest with such a low return?
Sorry, there is still a set of taxes that we haven’t taken into account yet.
Let’s say you live in New York or New Jersey. State corporation tax is over 7% in these states, and state capital gains/dividend tax can exceed 10% after paying federal taxes.
This adds about another $80,000 to your tax bill, which means you pay about $680,000 in tax on a gain of $774,000.
Congratulations: you pay about 86% tax on your profits.
How could Wall Street remain the financial capital of the world with investment tax rates approaching 90%?
It’s a bigger tax grab than even the senses. Sanders and Elizabeth Warren – the two strongest voices for radical income redistribution – agreed.
My advice to the rich: If Biden’s tax plan to dunk the rich ever sees the light of day, you’re a fool to invest. Just buy a yacht and sail instead.
Stephen Moore is Senior Fellow at the Heritage Foundation and co-founder of the Committee to Unleash Prosperity.