“If you make more than $1 million a year, you should not pay
less than 30 percent in taxes,” asserted President Obama in his
State of the Union speech.
For those with predominantly investment income, that would
effectively double their capital gains tax rate from the current 15
percent rate, producing a triple negative impact on U.S. economic
growth and job creation by reducing the incentive for domestic
investment, increasing the incentive to move more jobs and capital
overseas, and directly reducing the amount of capital available in
the private sector by way of greater transfers of income to the
government.
It’s not hard to understand the disincentives to job
creation in Mr. Obama’s proposal. If the government wants more
people to quit smoking, it increases taxes on cigarettes.
Similarly, if the government wants more people to quit investing,
the appropriate policy is an increase in taxes on investment
income. And if the government really wants to kill job creation and
new investment, it should double the tax on capital
gains.
So where’s the common sense in this call for more
roadblocks to investment, more disincentives for the financing of
companies and start-ups in the private sector, when 12.8 million
Americans by the government’s calculations are already out of work,
and millions more aren’t counted as unemployed because they’ve
given up looking for work and left the work
force, and millions more are working at
reduced pays or reduced hours.
Currently, over 10 million part-timers are looking for
full-time employment and can’t find it. None are included in the
government’s unemployment number.
Add it all up and the current jobless rate is 17 percent,
double the official unemployment rate of 8.3 percent.
So why would President Obama be pushing for such a
counterproductive policy, a tax hike that’s likely to slow economic
growth when we’re already growing too slowly, cut job creation when
we’re already breaking records in terms of long-run unemployment,
decrease American investment and productivity when we’re already
reeling from increased global competition, and reduce government
revenues when we’re already hemorrhaging trillions in red
ink?
The answer, it seems, is that President Obama is stuck on
“fairness,” so much so that he gives short shrift to any negative
consequences that will predictably flow from his repeated attempts
to produce more economic leveling, more redistribution of wealth
and income, and more “shared sacrifice.”
A clear illustration of how Mr. Obama assigns top priority
in his thinking to what he judges to be “fair” over what is
effective in terms of economic growth, job creation, and deficit
reduction was on full display in his reply to a question in a
presidential debate during the 2008 campaign.
Candidate Obama was asked by Charlie Gibson from ABC News
why he supported an increase in the capital gains tax rate, given
an historical record that repeatedly shows the government losing
revenue as a result.
Replied Obama, “Well, Charlie, what I’ve said is that I
would look at raising the capital gains tax for purposes of
fairness.”
And so, above all else, it’s “fairness” that matters,
defined as confiscating more money from “the rich,” even if means
bigger deficits, less revenue for government programs, less
investment, less job creation, and longer periods of joblessness
for the unemployed.
As a postscript, Gibson was on firm ground in linking tax
hikes on capital gains to subsequent drops in government revenue. A
study by the Joint Economic Committee of Congress in June 1997,
“The Economic Effects of Capital Gains Taxation,” highlighted
the inverse relationship:
The historical evidence suggest that capital gains
reductions tend to increase tax revenue. When capital gains tax
rates were lowered in 1978 and again in 1981, revenue climbed
steadily. Conversely, when the tax rate was increased in 1987,
revenue began declining despite forecasters predictions it would
increase. For instance, capital gains tax revenue in 1985 equaled
$36.4 billion after adjusting for inflation, yet $36.2 billion was
collected in 1994 under a higher tax rate. In other words, tax
revenue in 1994 was slightly less than it was in 1985 even though
the economy was larger, the tax rate was higher, and the stock
market was stronger in 1994.
As a second postscript, the unending criticism of the 15
percent tax rate on long-term capital gains ignores that taxpayers
are required to pay capital gains taxes on illusionary gains
because the income is not indexed for inflation. If inflation, for
instance, totaled 50 percent over the period of the investment, the
15 percent tax rate on capital gains is really a 30 percent tax
rate on the real, inflation adjusted, gain — and that’s not
counting state taxes or the double taxation that occurs on
investments by way of the corporate income tax.
