Democratic Debate: Obama and Clinton both Struggle to Understand Tax Rate vs Tax Revenue…
In a telling moment during the Democratic Debate in Philadelphia yesterday, April 16, 2008, both Barack Obama and Hillary Clinton appeared to fail to understand the difference between a tax rate and tax revenue.
The moment came about an hour and five minutes into the debate: both Democratic candidates have discussed raising the Capital Gains Tax from it’s current 15% rate. The moderator pointed out that the RATE decreased from 28% to 20% under Bill Clinton, and again from 20% to 15% under George Bush, however in both these cases, REVENUE to the government derived from this tax INCREASED. When the rate was previously increased to 28%, revenues DECLINED. He went on to ask, first Mr. Obama, then Mrs. Clinton, if they would still be willing to raise the tax rate, despite overwhelming evidence increases in the tax rate lead to LESS revenue.
Mr. Obama appeared very unsure of himself on this issue, stuttering several times. He responded by speaking about the “unfairness” of the current distribution of taxes and made references to populist catch phrases: “You can’t take out a credit card from the bank of China in the name of our children and grandchildren and then cut taxes”. The moderator once again pointed out that raising the tax rate has led to LESS revenue to the government. Mr. Obama: “[stammers] Well, that might happen and that might not. It depends on what’s happening on Wall Street and what’s happening in business”
Mrs. Clinton responded with: “We have to get back to an economy that works for everyone” and went on to discuss in very general terms infrastructure, the economy, her support of union jobs, the housing crisis, the mortgage crisis, freezing home foreclosures, freezing interest rates. But did not at any point address the question. The moderator reminded Mrs. Clinton that the question actually related to the Capital Gains Tax and asked whether she would raise the tax. Mrs. Clinton responded that she would not raise the tax beyond 20% (a 25% increase) if she raised it at all, missing the point the moderator repeatedly tried to make that such an increase historically results in LESS revenue for the government.
Neither candidate appears to appreciate people are not robots. Instead, people respond to a change in tax rates with a change in behavior. It’s no different than the supply and demand for a product: price goes up, demand goes down; price goes down, demand goes up, price in this case being the tax rate.
You can view the exchange here.
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