Cornyn Motion to Commit to Strike the Investment Tax
Below please find my colleague Jon Lieber’s analysis of Senator Cornyn’s motion to commit the health care bill to the Senate Finance Committee with instructions to strip out the 3.8 percent investment tax…
Summary
The reconciliation bill includes a brand new investment tax of 3.8 percent on investments for Americans whose AGI is above $200,000 if single and $250,000 if married.
Investment income is defined as interest income, dividends, annuities, royalties, or rents, business income derived from a passive activity, and net capital gain unless derived from disposition of property held in the ordinary course of business.
This tax is not indexed for inflation, so more and more Americans will become subject to the tax on their investment income over time, just like the Alternative Minimum Tax.
This tax raises $123 billion over ten years, and was included to fill the revenue hole left when Democrats scaled back the high-cost plans tax at the behest of unions.
Considerations
A tax on investment is a tax on savings that will discourage long-term economic growth.
Investment and savings are two of the key determinants of long-term prosperity. The Institute for Research on the Economics of Taxation estimates that a 2.9 percent investment tax would depress economic growth by 1.3 percent and reduce capital formation, a key contributor to long-run economic growth, by 3.4 percent.
Lower economic growth and less capital formation in the long run means fewer jobs, lower wages, slower growth, and fewer opportunities for future generations of Americans.
This tax will break two of the President’s tax pledges – first, as the tax is not indexed for inflation, it will ensnare millions of Americans who earn less than $200,000 or $250,000, which President Obama delivered a “firm pledge” not to do; second, President Obama pledged that “everyone in America – everyone – will pay lower taxes than they would under the rates Bill Clinton had in the 1990s.” This additional 3.8 percent tax combined with the proposal in President Obama’s budget to raise capital gains rates back to 20 percent will raise the top capital gains rate to 23.8 percent, above the level they were at in the 1990s.
The Wall Street Journal accurately called this “ObamaCare’s Worst Tax Hike.” With the replacement of the high-cost plans tax, which would have slightly encouraged more responsible shopping for affordable health plans, for this investment tax, Democrats have dropped all pretense that their bill is designed to “bend the cost curve” and instead are just turning to the old model of pure income redistribution to fund a new entitlement that will bankrupt future generations.