Capital Gains and Tax ‘Fairness’

Journal Editorial Report: It’s the biggest entitlement expansion since the 1960s. Images: Getty Images Composite: Mark Kelly

’Tis the season for raising taxes, and seemingly every Democratic state wants in on the action. The latest is Washington state, where legislators last weekend approved a 7% tax on capital gains above $250,000. Washington is one of eight U.S. states without an income tax, though voters have had to keep vetoing attempts by public unions to impose one in ballot initiatives. The politicians in Olympia won’t take no for an answer.

Washington’s constitution requires that income be taxed equally for all residents, which has thwarted previous plans. This time Democrats hope favorable political winds will lead to a court ruling upholding the capital-gains tax. Echoing President Biden,

Gov. Jay Inslee

says the tax will “bring a good portion of fairness to our tax system.”

Fairness? Washington state passed its new levy on capital gains even as Mr. Biden proposed a federal increase, which would raise the top rate to 43.4% from 23.8%, including the Affordable Care Act surtax. Combine the two tax increases, and Washington residents will now pay up to 50.4% of their capital gains to one government or the other.

Is it fair to pay in taxes more than half of what you gain on a long-held asset, especially when that taxable gain doesn’t account for inflation? Is it fair when that gain in value may have already been taxed once as corporate income? Then how do you define confiscatory?

The average combined state-federal top rate on capital gains for all states would exceed 48% under the Biden plan, according to the Tax Foundation. With the addition of Washington, 14 states would have a top rate above 50%. The list of states and the District of Columbia with the 12 highest combined capital gains rates is nearby, and Washington state now ranks 11th.

President Biden says his plan asks high earners to “begin to pay their fair share,” but it isn’t clear what rate he and state lawmakers think is unfair. Is it 60%, or 75%?

Higher levies on capital gains reduce investment, meaning workers who aren’t wealthy also pay for the tax in lower wages. The government loses too. When tax rates rise, capital-gain realizations invariably fall, which means that the government gets less revenue despite the higher rates. Even economists at the Congressional Budget Office, no nest of supply-siders, think the revenue-maximizing rate is 28%, while other economists think it’s closer to 15%. It sure isn’t 50%.

The same Tax Foundation report suggests that the Biden capital-gains tax plan would shrink federal revenue by $124 billion over 10 years. States would see a decline too.

The Biden and Olympia tax increases on capital gains won’t matter to

Bill Gates


Jeff Bezos,

who are already rich and can hire lawyers to shelter their future gains. The people who will be hit unfairly are the middle-class strivers or entrepreneurs who might be capital-gains “rich” for a year after a lifetime of work and investment. The politicians define “fair share” as taking more than half of everything they earn.

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Appeared in the May 3, 2021, print edition.

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