I posted last week on my Defining Ideas article on why California Democrats should oppose President Biden’s proposed increase in the tax rate on capital gains for high-income people. That article led to this 10-minute interview with John Batchelor earlier this week.
The interview starts at about the 0:40 point and goes to about 11:35.
I find John Batchelor’s style wonderfully old-school.
READER COMMENTS
Brandon
May 15 2021 at 2:46pm
Batchelor was once a great novelist, too. Check out his book The Birth of the People’s Republic of Antarctica. It’s so weird, old-school, and relevant that you’ll wonder why you didn’t hear of it or pick it up years ago.
Vivian Darkbloom
May 18 2021 at 10:15am
You may be correct with respect to the loss of revenue; however, I’m probably not as confident as you are about that prediction because there are a lot of moving parts. While the effect of the large increase in the LTCG tax rate will likely discourage some LTCG realisations, there are (at least) three factors that may offset the LTCG revenue loss.
First, taxpayers who would otherwise realize a LTCG (at current rates) would likely seek to extract revenue by other means. Thus, much of the (taxable) income will not be avoided but shifted. To my knowledge, for example, Biden does not propose to raise the tax rate on corporate dividends. If the tax rate on dividends does not change, I would expect more taxpayers to pay themselves dividends and more companies will likely respond to the desire for dividends by paying more. Other strategies would be spreading out the LTCG’s realized to ensure that income does not exceed $1 million in a particular year.
Second, the Biden’s proposal needs to be viewed in light of the entire package. While he does propose a massive increase in the LTCG rate, he also proposes to tax (most) unrealized capital gains at death. The likely result of this proposal is that taxpayers will realize more gains in the years before they die than is currently the case (particularly if the LTCG triggered at death is subject to the same $1 million threshold). And, if the law is implemented, I would fully expect California to “piggyback” on that for California income tax purposes (Amazingly, California does’t have any gift, estate or inheritance tax!) so that there would be a large increase in the LTCG tax on wealthy decedents.
Third, and this is especially relevant to California and Silicon Valley, the increase in the LTCG tax rate may result in a significant reduction in the number of Incentive Stock Options (ISO’s) granted in favor of other forms of incentive compensation, such as “non-qualified stock options”. I surmise that a not insiginficant percentage of the LTCG tax take by California is due to ISO’s. The main advantage of ISO’s is that the ultimate gain realized is taxed at LTCG rates (assuming the holding period is met). However, a significant disadvantage of the ISO is that the corporation granting the option does’t get any deduction for compensation expense. If ISO’s are taxed at ordinary income rates (above $1 million in gain) they would be considerably less attractive on balance when one considers the effect to both employee and employer. Again, the result of this is a shifting of income rather than the absolute avoidance of realization of income.
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