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Moderate GOP Senators Threaten To Kill Capital Gains Tax Cut In Healthcare Bill

Updated: Mar 24, 2023

By Ryan Ellis

There has been a lot of loose talk recently both in the conservative healthcare policy community and in the GOP Senate cloakroom about delaying or stopping repeal of the “net investment income tax” (NIIT), a 3.8 percentage point increase in the capital gains and dividends tax.

That loose talk should end.

According to the Tax Foundation, ending the NIIT would create 133,000 jobs. It will increase GDP by 0.7 percent. This in turn raises after-tax income by 0.6 or 0.7 percent for the lower four quintiles–i.e., the non-rich.

A family of four making $80,000 per year would see a raise of $480.

A single person making $35,000 per year would see a raise of $210.

Republicans didn’t just dream up a plan to cut the capital gains rate as part of Obamacare repeal. I agree with those who say that a healthcare bill is no place to have a debate over unrelated tax policy like capital gains. Unfortunately, that decision was made for us when Obama and the Congressional Democrats forced this very tax increase (and 20 others) on the American people as part of the original Obamacare law. The very same press now questioning why we’re getting rid of the NIIT never bothered to ask President Obama and the Democrats why they put it in to begin with. Fake news.

It is entirely appropriate that an Obamacare repeal/replace exercise have as part of its goal the removal of these 20 Obamacare tax increases. The NIIT is the most important one to remove–not because we have some fetish to cut taxes for “the rich,” but because it does the most damage to jobs and income growth for the middle class. 47 conservative groups, including Americans for Tax Reform, the National Taxpayers Union, the Club for Growth, and FreedomWorks agree. They sent a letter this month urging full repeal of these taxes, noting NIIT especially.

The NIIT is a tax increase on those making less than $250,000, after accounting for inflation. The income threshold for paying the tax was never indexed to inflation. As a result, the tax hits more and more families every year. According to the IRS, the NIIT nicked 3.6 million families in 2014, the latest available year. That’s up from 3.1 million the year before, the first year of the tax. It’s the new AMT, and it’s working its way down to the middle class.

Eliminating the NIIT would be an immediate cut in the capital gains rate from 24 to 20 percent. Anyone reading today’s CBO report will see it’s obvious that higher income households and businesses are deferring recognition of income in expectation of lower tax rates. I have no doubt that this tax cut will not lose the money our reliable and non-partisan staff at CBO thinks it will. Past is prologue here.

Tax reform is much easier if the NIIT is removed. For one thing, it’s easier to cut the capital gains tax if you’re starting at 20 percent instead of nearly 24 percent. Second, tax reform won’t have to make up for the NIIT’s anticipated revenues if it’s already been repealed. Third, getting rid of the NIIT changes the distributional ratios in the code, making overall tax reform design easier.

As the good nerds at the Tax Foundation (as opposed to the bad nerds at CBO) will tell you, capital is the mother’s milk of compensation. You don’t get to help the middle class if capital is on the sideline, and capital is on the sideline because the capital owners are waiting for the rate to come down. When it does, katie bar the door.

One final point: there is an undercurrent of desperation to all of this. There is a sense of “if we defer cutting this tax, we’ll get all sorts of credit for being reasonable, moderate, and helping the poor.” It’s similar to the efforts made in vain to appease the CBO coverage model overlords.

Well, the House tried that already. The NIIT’s cousin, the 3.8 percent Medicare payroll tax and self-employment tax bracket, saw its repeal delayed until halfway into the scoring window. How much credit did the Democrats or the media give the House for that? Precisely nothing. And that’s exactly how much appeasing the media-Beltway deep state elite will get us when it comes to the NIIT.

Read more here.

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