Barack Obama and Taxes

As part of his weak performance in the ABC debate (weak because Obama finally faced some "tough" questions, instead of mere softballs--again exposing that he has few qualifications to be President beyond the ability to deliver good prepared speeches), Barack Obama have a particularly weak, ridiculous answer to the capital gains tax question.

Gibson asked Obama WHY he wants to almost double the long term capital gains rate back to 28% (from 15%), when the previous capital gains tax CUT (part of Bush tax cuts, although Clinton also had cut the capital gains rate) had INCREASED the revenue to the Federal Government raised by the capital gains tax.

Obama "answered" with a non sequitur.  He fell back on his CLASS WARFARE attack on the money hedge fund managers make--ignoring that hedge fund managers do NOT pay long term capital gains on their earnings (and, in fact, largely engage in SHORT TERM trading for their CLIENTS, resulting in no long term rate benefit there either).

Ultimately, Obama weakly said taht it may be true (it is true) that more revenue was raised by the lower long term capital gain rate than with the highter rate, but it is not FAIR.  What does that tell you?  Right, it tells you where leftists are coming from.  Their goal here is a redistribution of weath, and an ISSUE, rather than effective raising of tax money.  To leftists, it is irrelevant that lower taxes usually raise MORE revnenue, and that higher taxes usually raise LESS revenue.

My brother is co-owner of a trucking company.  His own illustration of this principle is classic.  Oaklahoma decided to raise revenue from evil truckers (tear up the roads, you know, and scare other drivers) by a dramatic increase in the fees charged trucks to use Oaklahoma roads.  The legislators were shocked when their revenues from this "tax" went DOWN substantially.  Guess why?  Oh, comeon.  Even the dimest leftist out there can see this.  TRUCKERS AVOIDED OAKLAHOMA--thereby not only reducing the direct "tax" revenue, but hurting the economy of Oaklahoma.

What about this idea of "fair".  Obama, of course, raised the annoying (because totally misleading) idea of a secretary paying a higher tax rate than her boss (an example lifted from Warren Buffer, who would not have the reputation he has for investing if he were this stupid in investing his money).

First, MOST "secrtaries pay NO income tax at all, or very little.  It is an absolute fact that the bottom 50% of income earners in the United States pay only 4% of the taxes.  Nor is this a matter of them just paying a big percentage of lower income.  Most of these people pay NO income tax at all.  A significant number get money PAID TO THEM (earned income credit, and many such people will aso get a tax "rebate" this year on taxes they DID NOT PAY--nothing more than a gift).  The reason tax cuts benefit people who are better off is that those are the only people paying substantial taxes in the first pllace.  And tax cuts for those people usually RAISE revenue, while at the same time helping the economy provide JOBS for those who are not so well off.

Not only do the top 5 to 10% income brackets pay more than 50% of the total taxes, but that percentage has gone UP.  That is because of two factors.  First is the Oahlahoma effect, noted by Charlie Gibson's factual statement in his question that a lower capital gains--long term--rate RAISED revenue, that a lower tax RATE usually RAISES revenue (within reason).  Second, we have steadily increased the standard deduction and exemption amounts to the point that lower income earners pay little or NO tax.  This means that corporations, and the upper income people, pay almost ALL of the tax.

Is this "fair"? By most objective standards of "fairness", it is NOT "fair".   What Barack Obama is proposing is to INCREASE the UNFAIRNESS, in a way that DECREASES revenue.  What sense does that make?

It makes impressively little sense with regard to capital gains--especially long term capital gains.  There are those who argue that capital gains should not be taxed AT ALL.  Capital has already been taxed at least once.  Why should a person who gambles his already taxed capital have to pay more taxes when his gamble succeeds?  The idea that capital is NOT the same as income is embodied in the tax code as to LOSSES.  You cannot deduct capital LOSSES against ordinary income (except for the small, yearly amount of $3.000.00)..  Is it "fair" to tax capital GAINS, but not allow deduction for capital LOSSES?  Hardly seems so.

Nevertheless, it is stupid tax policy to eliminate taxes on capital gains completely (whatever the theoretical argument).  Why is that?  It is because one of the main goals of the tax system should be to eliminate GAMES, and the incentive to play games, where transactions are structured to fit the tax code, rather than for economic reasons.  If you eliminate the tax on capital gains, that merely encourage people to arrange transactions to CONVERT ordinary income into capital gains.  That is something we need to avoid.  That is also a good reason to have the lower rate onlly on LONG TERM capital gains (one year or longer).  That keeps the game playing to a minimum.

Let us go back to fairness.  Is it "fair" to have a person accrue a capital gain over YEARS, and then pay a tax rate the same as a perons who earned income all in one year (even apart from the theoretical distinction between income and capital gains).  Of course it isn't.  One way the general public is insulated from this truth is through the rules that generally EXEMPT "capital gains" on the sale of a homed.  If it were not for thsoe rules (no tax if you roll the money into a new house in a year or are over a certain age), the public would be screaming at the UNFAIRNESS of capital gains taxes, at a high rate, on a property that has been held for 20 years.  The effect is also mitigated by the "step up in basis" on death, where no capital gains tax is payable on an asset once a person dies (that is on the capital gain accruing before death). 

"Fairness" in the tax code is an elusive and complex thing, unless you are playing the redistributiion of wealth, Marxist, CLASS WARFARE game.  That is part of the appeal of the "Fair Tax" elimination the IRS.  The problem with that idea is that it necessarily means that a lot of people paying little tax now would be paying MORE tax. 

I liked the Reagan tax revolution of only 3 rates:  0%, 15%, and 28%.  If you combine that with the McCain proposal to reduce the corporate rate to 25% (again, ultimately a revenue RAISER), you have a rational tax system.  I think people can live with a 28% rate, with few "loopholes", if they are making substantial sums of money. 

What happened to that rational system.  Well, first George Bush 41 happened.  He BETRAYED the Reagan revolultion in a "deal" with Democrats for spending cuts that never happened.  Even if the spending cuts had happened, it was a BETRAYAL.  The ONLY chance to make the Regan revolution to a simpler tax system stick was to HOLD THE LINE.  Once Congress started tinkering with the tax system again, we were back to the same old pattern.

Congress LIKES to tinker with the tax system.  It is a way for politicians to assert that they are DOING SOMETHING.  Yet, the very WORST thing for our economy is constant tinkering with the tax system.  People need CERTAINTY in the tax system, so that they can plan with confidence. 

We could have done more to help the economy by keeping the simple Reagan tax rate system than by any other thing we have done.  The failure of George Bush 41 to even make a good fight out of this economic disaster is one reason I still regret not voting for Bill Clinton.

CERTAINTY in the tax system, and certainty at a level which encourages economic growth and INCREAASES revenue to the Federal Government:  what a novel concept.  Unfortunately, it is a concept that is novel to Barack Obama and Hillary Clinton--as well as most other Democrats.  I am afraid I have no cnofidence that John McCain really believes in the concept, despite his present rhetoric.  Yet, there are few other concepts so conclusively proven in the economic history of this country, and of the world.