Posts Tagged ‘obama tax hikes’
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).
Senator Barack Obama, Nancy Pelosi and other Democrats often talk of making the US tax system more “fair” by imposing additional taxes on higher earners. They argue this segment of the population should be carrying a disproportionally heavier load than the rest of the populace. It’s a very calculated and clever argument: it appeals to envy and social divisions while at the same time jeopardizing only a small segment of voters. But does it have any basis in reality?
When it comes to the US tax system, the wealthy already pay an astonishingly disproportionate share of all tax revenues. Take, for example, the top two percent of all earners: this group pays an incredible 43.6% ¹ of all personal federal income taxes. Yes, you read that right: two percent carry nearly half the load.
Well, you might argue, if they make 43.6% of all income, then that seems reasonable. Not even close: the top two percent of all earners take in 24.1% of all income.
The bottom 50% of all earners contributes a mere 3.3% of all federal income taxes (while earning 13.4% of all income).
Let’s drill down a little further and look at the top five percent: Senator Obama has called on increasing the taxes on this group, and he has defined them as earning $250,000 or more per annum (since then, he’s adjusted that to $200,000 in a television ad; his running mate, Senator Joe Biden, uses $150,000). What do the numbers say about this group?
Well, Senator Biden is closer to the truth than Senator Obama: the top five percent of all earners make $137,056 a year. They currently contribute, wait for it, 57.1% of all federal income taxes. Can it truthfully be said they are not carrying their fair share?
Britain experimented with similar wealth-redistribution schemes in the ’70s: the top earners were subjected to a 90% (yes, ninety-percent!) tax rate. What happened as a result? They left.
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.
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.