Investors Say “No” to 87% Tax Hike; Remain on Sidelines…

What would you do if you had the ability to legally avoid an 87% tax hike? Would you avoid the tax hike? Not surprisingly, many investors are answering in the affirmative.

As we previously reported, President Obama campaigned on a promise to increase the capital gains tax from its current 15% to, ultimately, 28% (an increase of 87%). He later called a 33% increase in this tax, from 15% to 20%, “modest”. Investors took heed, and the “Obama effect” on the markets has been evident ever since election day (see chart).

The DJIA dropped sharply the day Mr Obama was elected, and remains down 14.96% as of this writing.

An Open Letter to Senator Obama…

Senator Obama,

You spoke today about your plan to increase capital gains taxes from 15% to 20%. You referred to it as a “modest increase”.

Sir: most people, even most Democrats, do not consider a 33% increase in taxes “modest”.

You’ve also spoken about your intent not to raise taxes on the so-called “middle-class”.

These two statements are incompatible: over 100,000,000 Americans will be affected by your 33% tax increase (which you’ve previously said you’d ultimately raise to 28%, which would be a total tax increase of 87%). People who are relying on their retirement investments will be affected. People invested in mutual funds will be impacted. Hard working people who rely on their union-negotiated pension will be affected, since those same pensions invest in the markets.

Further, at a time when capital has retreated on a wholesale basis from the markets, threatening the entire economy and making investments by companies in job-creating growth virtually impossible, do you truly believe new barriers to capital are prudent economics?

Senator Obama, please, please reconsider this course of action. Neither the American people nor the economy can reasonably be expected to sustain a 33% tax hike, and while ideology is a fine thing in extremely small doses, now isn’t the time to impose it, regardless of how tempting control of all arms of the Legislative and Executive branches of government may make it.

Obama’s Proposed 87% Increase to Capital Gains Tax Exactly What the Economy Doesn’t Need…

Senator Barack Obama has proposed moving the Capital Gains Tax from its current 15% rate to 28%, an increase in the tax rate totalling a shocking 86.6%. It couldn’t come at a worse time.

While trillions of dollars in capital has disappeared from the markets, adding a dis-incentive for investors to return to the markets is a sure-fire strategy for lengthening the current downturn. And when companies cannot readily access capital, they can’t build new plants, take on R&D expenditures or do all those other things that lead to the people on “Main Street” gaining access to new jobs.

What’s worse is that Mr Obama does not seem to understand the fundamental difference between a tax rate and tax revenue: changes in tax rates lead to changes in the way people behave. For example, Presidents Ronald Reagan, Bill Clinton and George W. Bush all cut the Capital Gains Tax. Under Clinton, it was 28%. Under George W. Bush it sits at 15%. After each of these tax cuts, tax REVENUE actually increased.

The kind of increase Mr Obama proposes therefore has a dual negative effective with no discernible upside: investment capital stays out of the market and government revenues from the Capital Gains Tax shrink.

So why would Senator Obama consider such an ill-fated move? He thinks it’s “fair”.

You can see Mr Obama’s explanation in the video below – note Jim Lehrer, the moderator, attempt three times to explain to Senator Obama that tax revenue decreases as the Capital Gains Tax increases.

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.