Tax Reform

Capital Gains Taxes: The Phantom Menace

Film fans are abuzz over news that George Lucas will sell LucasArts, along with the globally renowned “Star Wars” franchise to Disney for a staggering $4 billion.  But as Quentin Fottrell at The Wall Street Journal’s MarketWatch illustrates, the decision may have more to do with taxes than filmmaking.

The Heritage Foundation calls it the “Taxmageddon,” Federal Reserve Chair Ben Bernanke calls it the “fiscal cliff,” but by any moniker Americans are facing a massive tax hike on January 1.  Financial planning experts agree that the Star Wars-Disney deal was a “textbook example” of closing down a business while avoiding the worst of estate and capital gains taxes.  The current capital gains tax, set at 15 percent, is scheduled to rise to 20 percent.  That number rises to 23.8 percent when one includes the surcharge on investment included in the health care reform law.

If that sounds insignificant, The Wall Street Journal spoke to a small business owner, Bert Wolf, who is selling his compressed gas business this year to avoid the tax increase.   He said that if he waited to sell, he would have to grow his business “for at least three or four more years to achieve the same after-tax sales dollar.”  In context, the capital gains tax increase scheduled to hit next year will consume three to four years of hard work for no gain.

The MarketWatch article points out that while nothing may be simple in a $4 billion deal between movie studios, it may actually be harder for small business owners to exit their companies.  “The owner of a restaurant or landscaping business probably won’t have the option of selling to a Fortune 500 company… they may have to bring on a junior partner or wok out a royalty arrangement with a new buyer.”  Which means that small business owners, not billion dollar companies, will be the hardest hurt by tax increases.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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