Obama’s tax plan: ‘Mixed bag’

Industry insiders sounded off on the tax plan President Barack Obama presented to Congress in his State of the Union address Tuesday night.

The plan, expected to bring $320 billion of revenue over a 10-year period, would involve raising the capital gains tax on couples earning more than $500,000 a year from 23.8 percent to 28 percent, the same rate as under President Reagan.

The capital gains tax is the tax rate for the profit derived from selling a share of stock. In 2013, the rate rose from 15 percent to 20 percent as a part of the “fiscal cliff” deal for couples making more than $450,000 a year. In part of the Affordable Care Act, placing a 3.8 percent rate on couples making more than $250,000 a year would fund Medicare.

For example, if one were to invest $100,000 in a company, then sell the stocks for $1 million, the rate he or she would pay would be $214,200 at the current rate, while under the proposed rate, it would be $252,000.

Loera Friedberg, an associate professor of economics at the University of Virginia, said the raise would have short-term revenue effects, but would not have long-term effects.

“In the short run, it will lead to a temporary turn in the stock market before a rise would take effect because people would be selling their stocks at the lower rate,” Friedberg said. “In the long run, people in this income range are pretty tax savvy, so they’ll invest more of their money in tax-deferred accounts.”

George Karnes II, an Edwards Jones financial adviser in Front Royal, said it is too early to tell what the effects on the stock market would be until legislation is passed. Karnes said a raise on the top level of capital gains tax rates would impact very few people.

“That talk about the ‘1 percent’ from a couple years, those folks are going to be the people a rise would affect,” Karnes said. “A raise in capital gains tax would have some impact, but not huge because most wealthy investors buy stuff and hold it forever.”

In addition to the raise in the capital gains tax, Obama also proposed closing what the administration has called the “trust fund loophole,” where an inherited investment becomes the new baseline for the capital gains tax rate.

For example, if one were to inherit $1 million worth of stocks that grew from a $100,000 investment, he or she does not pay a tax on the $900,000 in profit. Instead, the $1 million is treated like an initial investment and therefore not taxed upon inheritance. Under Obama’s proposal, the $900,000 would be taxed upon inheritance.

Friedberg said treating an inheritance of stock like a sale of stock “makes sense.”

“I like the idea of having even treatment and eliminating loopholes,” Friedberg said. “It makes sense to have the same tax rate on the same stuff, because to have the tax rate change because somebody dies means people will hold onto stock longer than they want to.”

Barnes said while he would “be shocked if it passes,” applying capital gains taxes to inheritances would be a boon for federal government revenue.

“The Treasury would reaps huge amounts of money from it,” Barnes said. “It would get a lot of tax revenue … seeing the size of some of these estates on a regular basis, this would really be a huge source of revenue.”

Another part of the tax plan calls for imposing a fee on investment firms with assets exceeding $50 billion. Barnes said his firm falls into that bracket and is highly opposed to the plan.

“If that fee gets levied, it will pass through every firm and be put onto every investor in America, who will have to pay 1 percent more,” Barnes said. “That’s a lot of money coming out of the investors’ pockets.”

Friedberg said if the tax plan were to pass, it would mean wealthy investors would shift their monies to more untaxed portfolios.

Barnes said if the tax plan were passed, the effects on wealthy investors could influence market performance.

“While they are few in number, what the wealthiest do can influence the curb on market activity,” Barnes said. “It affects all of us, somewhere down the line.”

Contact staff writer Henry Culvyhouse at 540-465-5137 ext. 184, or hculvyhouse@nvdaily.com

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