Eliminate the Capital Gains Tax

Mike Whalen is a Job Creators Alliance member and the president and CEO of Heart of America Group, which developed, owns and operates 27 restaurants and hotels in 10 metropolitan areas of six Midwestern states.

Last week, a fellow Jobs Creators Alliance member made the case that comprehensive tax reform is too important to be boiled down to a simple sound-bite or bumper sticker. He’s right. But even as the need for overhauling our nation’s cumbersome tax code grows–there are commonsense principles of reform that could actually fit on a bumper sticker. Here’s one, for example: You shouldn’t be taxed twice.

Seems straightforward enough, but that isn’t the reality.

First, it’s worth reminding people that we have a tax system that requires the wealthiest people in our society to pay more than lower income earners. According to the nonpartisan Congressional Budget Office, between 2007 and 2009, the richest 20 percent paid nearly 70 percent of federal taxes–and that disparity is growing. In 2009, the top 10 percent income earners paid 71 percent of federal income taxes, while about half paid none at all. In the case of people who derive most of their income from returns on investments, the tax rate they pay can appear much lower, when they may actually be paying much more. In fact, this was a major news story this past week when Republican presidential candidate Mitt Romney reported paying 14.1 percent in taxes in 2011, sparking a media firestorm about how little such a wealthy person was paying. But, this misses a major point.

The reality is that Romney, and others like him who derive significant capital gains or dividends, has already been taxed by the time they receive this income, which is taxed around 15 percent. But this income gets taxed twice, once at the corporate level and then again at the individual level. Added together, the total tax rate may, in some cases, reach 44.75 percent. The bulk of the tax payments were lopped off before the investor received a penny. The seemingly lower tax rate is simply an artifact of how taxes are calculated rather than a reflection of the actual taxes paid.

You can sort of see how this works in your own paycheck. When you get your paycheck, your employer withholds income taxes, subtracting them from the amount you receive. When you file your taxes at the end of the year, you may owe very little or even get a refund. That doesn’t mean you didn’t pay taxes, just that they were taken out of the check before you ever received it.

The tax code treats corporations and their investors as two different people, but the principle is similar, except investment income is taxed again after the taxes have already been paid at the corporate level. Imagine how frustrated you might be if you had to pay taxes a second time on the money you take home after your employer already withheld taxes from your paycheck.

The point here has less to do with Romney or other wealthy individuals and their tax rates and more to do with how the tax code is structured and what types of behavior it encourages.

Investment is the lifeblood of any economy. It provides the money companies need to grow, expand, and hire people. So, encouraging investment should be a high priority. The more you tax something, the less of it you’ll get. So, if investment is something we want more of, it makes sense that we have low rates on investment income. In fact, there are those who would argue that because they punish investment, taxes on capital gains are economically inefficient and that the best policy would be to do away with them altogether.

As an entrepreneur and job creator, I believe that we ought to have a free enterprise system that incentivizes investment. As we look toward this fall’s elections and the impact that the results could have on the overall policy debate and efforts for comprehensive tax reform, it’s imperative to focus our elected leaders on progrowth policies that will encourage economic growth. In the midst of a fragile recovery is not the time to be raising taxes on anyone–much less on the kind of economic activity that will power entrepreneurship: investment. A return to a 28 percent capital gains rate would result in the loss of more than 600,000 jobs annually. By contrast, eliminating taxes on investments would create 1.3 million jobs per year.

At a time when we are all rooting for a durable and sustainable American recovery, we should be doing everything we can to get the engine of our economy roaring again. Commonsense tax reform is a critical part of that goal.