Impacts of recent Capital Gains law proposal

[BobC]

Originally Posted by egri

My concern with that is the brackets come down over time, while rates generally go up. Adjusted for inflation, when the income tax was introduced, the top bracket was 7% on incomes above $12.9 million. Now it's 37% on everything above $500,000. Four years after the tax started, the top rate was 67%, and with the exception of a few years in the 1920s, it stayed above 60% (and often above 70/80/90%) until the late 1980s. Since then it's been going back up, with occasional cuts never sending it back down as low as it was before. If someone is smart enough to build a successful business from scratch, they're probably also smart enough to look at that trend, then find the Cayman Islands on a map, as Sir John Templeton did.

With the Tax Reform Act of 1986 they dropped the top individual tax bracket rate from 50.0% down to 38.5% on taxable income in excess of $54,000 for single individuals, starting in 1986. In contrast, the top individual tax bracket rate for 2020 is 37.0% on taxable income in excess of $514,800 for single individuals. And I believe the highest the individual tax bracket rate has been during this period from 1986 was 39.6%, with the lowest top bracket rate during this same period at 35.0%. So in truth the top tax bracket rate is actually lower today than it was about 35 years ago in 1986, and during those ensuing 35 years has never been more than 1.1% higher, at a top bracket rate of 39.6%.

As I noted above, the top individual tax bracket rate for single taxpayers started at $54,000 back in 1986, and has since risen to now starting at $514,800, almost 10 times what the top bracket rate started at back in 1986. Meanwhile, in looking up a few measures of inflation in time over that same 35 year period from 1986 to today I found:

The average annual inflation rate over that 35 year period is 2.55%

$1 in 1986 adjusted for inflation is worth $2.42 today in 2021

The CPI (consumer price index) in 1986 = 109.600

The CPI in 2021 = 264.877

Given all that, I think an almost ten times increase in the amount at which an individual starts to pay income taxes at the highest marginal tax rate over the same 35 year period as these inflation measures is not too shabby. So exactly where are you getting your data from that indicates that since the late 1980's that the top marginal tax rates have been going up, and that the tax brackets have been going down?

As for business owners potentially moving away from the U.S. if they begin to feel their tax burden is becoming too heavy, that is one reason that all the rhetoric spewed about having the rich and well-to-do pay an even bigger share of their income as taxes is just that, rhetoric, to appease a portion of the voting masses. The government knows they can't afford to completely alienate a good portion of their business community and its leaders, for fear they would pull up and move elsewhere. The business world has changed so much since WW2 with major leaps in technology, tranportation/logistics, computers and the internet, and the globalization of the marketplace. Companies that used to just worry about producing/providing for the U.S. market are now able to go global and easily reach and deal with customers and suppliers anywhere in the world. And that has become even more pronounced in the midst of the covid pandemic as companies and people started being forced to work more remotely than they ever had been before. And as a result, to pick up and move business operations and people to other parts of the world may not be as difficult and far-fetched as previously may have been thought. So now the federal government does have to pay attention to how they tax and treat businesses and their owners else possibly lose them to other countries. Luckily we are still one of, if not, the top consumer economies in the world. That will keep a majority of businesses from ever leaving due to the need to be here in the U.S. to fill our consumer needs. And then of course, despite all the negative things that have occurred in recent times, an overwhelming majority of Americans still consider this the greatest country on the planet and would rather live in the U.S. than anywhere else in the world. But despite all that, our government will likely still not go overboard with tax increases to the business community and its owners/leaders for fear of starting to change such pro-U.S. thinking.