That didn’t take long. Since our September 4, newsletter, Vice-President Harris has broken with the President on her proposed increases to the long-term capital gains (LTCG) rate. Under her new plan, the gain on assets held more than a year would be taxed at 28% instead of 44.6% for those with incomes above $1,000,000. There would also be a 5% investment income surtax creating an effective rate of 33%. I believe that the corporate tax hike remains at 28%. Let us know if you need a copy of the newsletter for a full discussion.
I recall the last time that the LTCG rate was raised substantially. Since many or most people are naturally averse to significant taxes, the majority of investors I dealt with chose to not sell anything rather than pay the 28% tax. Business owners, who are the primary target of these taxes, sought sophisticated financial advice so as to structure the sale of their firms to avoid the tax. These hikes are great for tax attorneys, high-end accountants, and advisory firms such as Treasure Coast Financial Planning.
If the goal is to generate revenue necessary to run the government, then corporate and capital gains taxes are among the least reliable sources of income. The simple reason is that corporate and capital gains tax receipts are not driven by the rate, unless it is so high as to discourage transactions, but by the state of the economy. Receipts go up during booms and down during recessions. Thus, government receipts collapse just when revenue is most needed.
The chart below shows corporate receipts from 1/1/2000 through 1/1/2023. The gray bars are recessions.
The top rate on corporate income varied from 38% in 2000 to 21% beginning in 2018. Rates had an insignificant impact on receipts, but booms and busts caused wild swings in government revenue.
From a financial-planning perspective, potential rate changes have a far more dramatic impact on our clients’ revenue than the government’s. As I wrote in the newsletter, “election-year proposals have all of the substance and duration of a morning fog.” I doubt that either of the presidential candidate’s proposals become law, but we shall stay alert and keep you informed.
https://www.nytimes.com/2024/09/04/us/politics/harris-tax-break-small-business.html
U.S. Bureau of Economic Analysis, Federal Government: Tax Receipts on Corporate Income [FCTAX], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FCTAX, September 6, 2024.
* https://taxfoundation.org/data/all/federal/historical-corporate-tax-rates-brackets/