Definition and distinction from other taxes
In the excerpts, the capital gains tax is defined by David Lesperance as the tax owed when a purchased asset — “whether that’s a share or a property or a business” — increases in value, so that the value of the capital has increased. He contrasts it with the income tax, a tax on current income, and with a wealth tax, which takes a percentage of assets annually whether those assets are increasing, stable or dropping in value The Flight of the Golden Geese (2020).
Bob Zadek offers a parallel working description: the low capital gains rate imposes a lower level of taxation on income gained on an asset held for a period of time and then sold at a profit, stock being his example, and he notes the view that the lower tax encourages investment Is it too late to step back from the edge of fiscal insanity? (2020).
Rates named in the episodes
The excerpts attach specific numbers to the long-term federal rate. Lesperance puts the federal rate at 23.5% and the ordinary rate at 39%, and describes a Democratic Party platform plank to raise long-term capital gains to the ordinary rate The Flight of the Golden Geese (2020). Chris Edwards, in a later episode, says the current federal capital gains tax rate is 24% and that Biden wants to raise it to around 40%, elsewhere describing the promise as doubling the rate “from around 20% to 40%” Is it too late to step back from the edge of fiscal insanity? (2020).
Revenue arithmetic
Lesperance imposes on listeners what he calls one equation: X times Y equals Z, where X is taxable income, Y is the rate and Z is dollars paid. He applies it to the claim that Warren Buffett’s secretary pays more tax than Buffett: a secretary earning $100,000 at a combined rate of, say, 40% nets $40,000 for the government, while Buffett with $10 million in capital gain at the lower 23.5% rate pays $2.3 million. A government trying to maximize revenue, he argues, would prefer the larger figure The Flight of the Golden Geese (2020).
David Henderson makes a related point in an earlier episode, saying there is one area where reducing the capital gains tax rate somewhat would probably cause the government to make more revenue, and crediting Steve Moore with laying that out in an article on capital gains in the Concise Encyclopedia of Economics. Henderson’s context is his view that Moore would be well suited to be Assistant Secretary for Economic Policy, pushing for capital gains tax cuts, though not to a seat on the Federal Reserve Board David Henderson on Trumponomics, Deficits, and Immigration (2019).
Investment, risk and Silicon Valley
Edwards argues that the American high-tech economy in Silicon Valley depends on low capital gains taxation because the return to innovative startup companies is a capital gain, and that doubling the rate would kill Silicon Valley and America’s high-tech innovation industries. He says he does not understand why there is not more of an outcry from Silicon Valley and the tech industry about the proposed plans Is it too late to step back from the edge of fiscal insanity? (2020).
Pressed by Zadek on whether there is empirical data linking risk-taking to the capital gains rate, Edwards describes a Silicon Valley in which angel investors and venture capitalists put tens and hundreds of billions of dollars into highly risky startups, with only about one in ten investments becoming big hits. He asks why they do this rather than put money into safe S&P 500 industrial stocks or tax-free muni bonds, and answers that it is for the chance of a big capital gain years down the road. He cites as evidence that every major industrial country in Europe, Canada and Australia has much lower capital gains tax rates for the same reason Is it too late to step back from the edge of fiscal insanity? (2020).
In a later episode Edwards returns to the same mechanism through his Cato study of angel investment, saying about 330,000 wealthy people in the United States take a share of their income and invest in startup companies. He instances Elon Musk investing previous wealth, which he thinks came from PayPal, in a startup called Tesla; Henry Ford’s third attempt at a car company, the two previous ones having failed, backed by an investor willing to take a risk; and Jobs and Wozniak finding an investor willing to put $100,000 into them. Behind Amazon, Spotify, Airbnb and Uber, he says, were wealthy people willing to put money in initially, and the reward for those investors is ultimately a capital gain Debt & Taxes (2021).
Zadek restates the calculation in that episode: an angel investor who expects nine failures and one success must, if the benefit is taxed heavily, succeed in one out of six rather than one out of ten to get the same return, which means less risk can be taken, riskier ventures get no money and innovation is stifled. Edwards agrees and adds that investors always have alternatives — government securities, tax-free muni bonds, dividend-paying safe corporations — and that biasing everyone toward safe assets would cost the economy the innovation it needs Debt & Taxes (2021).
Expatriation and the flight of capital
Lesperance reports that the prospect of an increase in capital gains to the ordinary rate has been a driver for clients to give themselves the insurance policy or the ability to leave, and that clients are packing the parachute and jumping out of the U.S. plane to more favorable destinations. He says he has a number of clients who will be expatriating after January 1st and before the inauguration for the sole purpose of avoiding paying tens of millions of dollars in capital gains tax as a result of that policy, and that not only will they not pay the additional capital gains, but they and their future tax revenue and the jobs they created — major companies with lots of employment — will no longer be in the U.S. The Flight of the Golden Geese (2020).
In the same episode he notes that the wealth tax was not adopted in the platform, while the increase in capital gains to ordinary was definitely one of the drivers, and that how much happens will depend greatly on what happens in Georgia, control of the Senate, and how much President-elect Biden chooses to use executive power The Flight of the Golden Geese (2020).
Across episodes
The topic recurs across the excerpts, and the treatment is consistent rather than developing: Henderson in 2019 treats capital gains cuts as a revenue-raising possibility and as a suitable portfolio for an economic-policy appointee; Lesperance in November 2020 supplies the definition, the rate figures, the revenue equation and the expatriation account; Edwards in December 2020 and again in November 2021 supplies the Silicon Valley and angel-investment argument. The later episodes do not revise the earlier ones; they extend the same claim about low rates and risk-taking to more examples.
What the sources do not cover
The excerpts do not state the statutory name of any capital gains provision, the effective date of any rate change, or the outcome of any legislation. They do not report empirical studies measuring the link between the capital gains rate and investment, only Edwards’s assertion that such a general understanding exists among finance experts. They do not give the title or date of Moore’s encyclopedia article beyond its location, and they do not resolve whether the rate figures of 23.5%, 24% and “around 20%” refer to the same measure.