Claim that Cap Gains Hike Will Hurt American Prosperity Is Ridiculous

Wow, talk about getting your knickers in a twist.  Joe Biden’s plan to tax capital gains as ordinary income for people making over $1 million a year really hurt the feelings of some on Wall Street. The general theme seems to be, “ungrateful peasants, you just don’t appreciate everything we do for you!”

• “It is insanity,” said Scott Minerd, who oversees $310bn in assets for Guggenheim Partners and specializes in hyperbole. “That’s not because I’m a Wall Street capitalist,” he said (unconvincingly). “The proposed rates of the current president’s administration . . . would probably reduce tax revenues over time and would discourage people from allocating money towards long-term investments.” Scott Minerd, champion of the people…
• “This isn’t about feeling sorry for millionaires,” said Anthony “Mooch” Scaramucci, millionaire, early Trump promoter, and founder of the hedge fund of funds SkyBridge Capital, which collects fat fees for generating low single digit returns over all time periods. (this is known as “wealth creation”).  “Doubling the top capital gains rate would have deleterious effects on job creation and wage growth for middle-class workers.” Wow, not just bad but deleterious!  Thank you, Professor Mooch.
• The proposals “might kill the golden goose that is America”, tweeted Tim Draper, one of Silicon Valley’s best-known venture capitalists and part owner of the golden goose.
• Another prominent tech investor (smart enough not to let his name be used) agreed that “it shifts the model more towards consumption than investment. In my opinion [that] is bad for the economy [in the] long run, as rich people become more focused on consuming now [rather] than investing or saving for the future.” Shield your eyes, hide the children, more consumption by rich people!

This is all complete and utter nonsense.  Leaving aside the issue of how much money it will end up raising, the core of the “I care so much not because I personally will be smacked but because of my love of country” argument is that unless we continue to allow “wealth creators” (tee hee) to pay lower tax rates than nurses and teachers, the American economy will suffer from a massive decline in investment spending.  Less investment equals less economic growth.  In other words, anything that dings the top 1% will devastate the rest.  The bumper sticker version is, I’m Rich. You’re Welcome.

The argument is familiar because it’s been made by Republicans for four decades: higher taxes on capital investment will, all else being equal, reduce national investment. Because investment spending is one of the core drivers of long term economic growth, the argument goes, higher taxes on cap gains will reduce long term growth.  I’m not an economist but the GOP argument should make no sense — in 2021 — to anyone who pays attention to contemporary financial markets. The American economy is light years away from having a shortage of capital for investment.

In the economic textbooks of the past, the models described an economy where scarcity was the underlying condition.  Scarcity of materials, products, labor, and capital.  This economy no longer exists.  In 2021, capital is virtually free (zero interest rate policy) and nearly infinite (QE, cash glut).  Many billions of dollars are invested in assets with a negative yield — or assets backed by absolutely nothing (bitcoin).  Investors are so desperate to throw capital at investment opportunities, they’re funding shell companies who simply promise to invest in something in the future!  Hundreds of “zombie companies” continue to survive.  All time record high private investment dry powder stands ready to be invested at all time record high absolute and relative valuations. The buyout folks get excited at the prospect someone somewhere will want to sell something. If we have any problem, it’s too many dollars chasing too few decent investments. 

Yes, someday in the future things may look very different and a “more normal” capital market may come to be — and then it might be the case that we need to worry about lack of investment.  Does anyone think that’s going to happen anytime soon?  That the Fed will reverse course 180 degrees and say to Wall Street, you’re on your own, chumps? Don’t we have enough problems in this country without worrying about theoretical problems possibly occurring sometime in the future?

Scott, Mooch, Tim, and Nameless Prominent Tech Investor: explain to me how great investments won’t get funded in the future if 0.5% of US taxpayers pay 43% on cap gains?  When trillions of foreign, tax-exempt, and corporate capital is scouring the world for something, anything, with a decent risk/return profile?  Has anyone ever made such a ridiculous and self-serving argument?  If the Biden plan were to pass and the 1% dumps their stocks and spends all their wealth on marathon orgies of consumption, there is a vast ocean of capital to replace it.

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