Obama's Capital Gains Tax

[MosesPresley]

I've been googling, yahooing, etc. and I'm unable to pin him down.

Does anybody know what Obama's going to raise the CGT to?

[Ramo]

He hasn't pinned himself down, except to say that the maximum would be the pre-Bush tax cut rate.

[DinoDoc]

It seems that issue is about what he percieves as "fair" not about economics. However, this is the most clear I've seen him be on the issue:

MR. GIBSON: All right.

You have however said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton, which was 28 percent."

It's now 15 percent. That's almost a doubling if you went to 28 percent. But actually Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20 percent.

SENATOR OBAMA: Right.

MR. GIBSON: And George Bush has taken it down to 15 percent.

SENATOR OBAMA: Right.

MR. GIBSON: And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

SENATOR OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness. We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year -- $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair.

And what I want is not oppressive taxation. I want businesses to thrive and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools.

And you can't do that for free, and you can't take out a credit card from the Bank of China in the name of our children and our grandchildren and then say that you're cutting taxes, which is essentially what John McCain has been talking about. And that is irresponsible.

You know, I believe in the principle that you pay as you go, and you don't propose tax cuts unless you are closing other tax breaks for individuals. And you don't increase spending unless you're eliminating some spending or you're finding some new revenue. That's how we got an additional $4 trillion worth of debt under George Bush. That is helping to undermine our economy, and it's going to change when I'm president of the United States.

MR. GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

http://www.nytimes.com/2008/04/16/us/politics/16text-debate.html?pagewanted=all

[Zkribbler]

EXPERTS AGREE THAT CAPITAL GAINS TAX CUTS LOSE REVENUE

During Wednesday’s Democratic presidential debate, Charles Gibson of ABC News made the following statements about capital gains taxes:

“Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20 percent and George Bush has taken it down to 15 percent and in each instance when the rate dropped, revenues from the tax increased. The government took in more money.”

“So why raise it [the capital gains rate] at all, especially given the fact that 100 million people in this country own stock and would be affected.”
These statements, echoed in a Wall Street Journal editorial today, are seriously misleading, as explained below.

Cutting capital gains rates reduces revenues over the long run. That’s the conclusion of the federal government’s official revenue-estimating agencies, as well as outside experts and the Bush Administration’s own Treasury Department.

The non-partisan Congressional Budget Office (CBO) and the Joint Committee on Taxation have estimated that extending the capital gains tax cut enacted in 2003 would cost $100 billion over the next decade. The Administration’s Office of Management and Budget included a similar estimate in the President’s budget.
After reviewing numerous studies of how investors respond to capital gains tax cuts, CBO commented that “the best estimates of taxpayers’ response to changes in the capital gains rate do not suggest a large revenue increase from additional realizations of capital gains — and certainly not an increase large enough to offset the losses from a lower rate.”
The Bush Administration Treasury Department examined the economic effects of extending the capital gains and dividend tax cuts. Even under the Treasury’s most optimistic scenario about the economic effects of these tax cuts, the tax cuts would not generate anywhere close to enough added economic growth to pay for themselves — and would thus lose money.
While a capital gains tax cut can lead investors to rush to “cash in” their capital gains when the lower rate first takes effect, it does not raise revenue over the long run.

Especially when a capital gains cut is temporary, like the 2003 tax cut that Gibson cited, investors have a strong incentive to sell stocks and other assets in order to realize their capital gains before the capital gains tax rate increases. This can cause a short-term increase in capital gains tax revenues, as happened after the 2003 tax cut.

Capital gains revenues also increased after 2003 because the stock market went up. But the stock market increase was not a result of the 2003 tax cut, as a study by Federal Reserve economists found. European stocks, which did not benefit from the U.S. capital gains tax cut, performed as well as stocks in the U.S. market in the period following the tax cut.
To raise revenue over the long run, capital gains tax cuts would need to have extraordinary huge, positive effects on saving, investment, and economic growth that virtually no respected expert or institution believes they have. In fact, experts are not even sure that the long-term economic effects of these capital gains tax cuts are positive rather then negative.

One reason is that preferential tax rates for capital gains encourage tax sheltering, by creating incentives for taxpayers to take often-convoluted steps to reclassify ordinary income as capital gains. This is economically unproductive and wastes resources. The Urban-Brookings Tax Policy Center’s director Leonard Burman, one of the nation’s leading tax experts, has explained, “shelter investments are invariably lousy, unproductive ventures that would never exist but for tax benefits.” Burman has concluded that, “capital gains tax cuts are as likely to depress the economy as to stimulate it.”
Middle-income families derive only a miniscule benefit from the 2003 cuts in capital gains and dividends.

Charles Gibson’s second statement — that 100 million Americans own stock and would be affected by a change in the capital gains tax rate — also is mistaken.

Most middle-income Americans own much or all of their stock through 401(k)s, IRAs, or other tax-preferred saving accounts. They do not pay taxes when their stocks within those accounts go up, so a change in the tax rate doesn’t affect them.

[Ben Kenobi]

Wow, so a 100 percent capital gains tax would obviously be the best, since the government would take in more money, and the debts would be wiped out.

[Zkribbler]

Far better than a 0% capital gains tax, which wouldn't bring in any money at all.

[Aeson]

At least you'd still have investments stimulating the economy at 0%. At 100%... the markets would cease to exist.

[rmsharpe]

Originally posted by Zkribbler
Far better than a 0% capital gains tax, which wouldn't bring in any money at all.

How? People would be investing in businesses and when those businesses grow, they're taxed.

[Ben Kenobi]

Think about the employees too. If the businesses are booming, then the employees are all making a killing and you can tax them.

You can make an awful lot more on employed folks rather then the unemployed.

[Zkribbler]

Originally posted by Ben Kenobi
Think about the employees too. If the businesses are booming, then the employees are all making a killing and you can tax them.

This explains why the income of middle class Americans hasn't gone up since the 70's.

[Arrian]

Nice, Zkrib. Where did you find that?

I've no doubt there is a level you don't want to cross, or it will have a negative impact on investment. I doubt, however, that it's 15%.

-Arrian

[Zkribbler]

Originally posted by Arrian
Nice, Zkrib. Where did you find that?

I've no doubt there is a level you don't want to cross, or it will have a negative impact on investment. I doubt, however, that it's 15%.

-Arrian

Are you referring to the article I posted? It's here: LINK

I Googled "capital gains tax cut revenue" and it was the first article that popped up.

[snoopy369]

I think (and have said before) that there should be a 'normal' rate, and then the government should drop the rate periodically - or raise it - for a short period of time, when it is necessary to spur investment. Perhaps it should even be tied to the dollar or some other appropriate measure. Dropping the CG rate, temporarily, encourages investment in stocks as opposed to other uses of money; there is no question there. It can be very helpful to stimulate investment, in the short term. This is NOT a bad thing.

What is a bad thing would be if it stayed down there forever; it no longer would accomplish the benefit of the quick stimulus, and prevent a later shot-in-the-arm from being possible (without significant loss). It's also not fair, of course, to the extent that matters.

CG tax should be set based on the expected rate of return of the stock market. If the current stock market has a expected rate of return of 7%, and you can otherwise get about 4% on a treasury bond, then the tax should be something less than the 3% difference (which would be 3/7 or 42%). There should be a minimum (say 15%) and a maximum (say 35%, or the current normal tax rate for that bracket), and then allow it to float (say, defined by the Federal Reserve Board?) amidst those numbers. In a strong economy, 35% is fine, because you have plenty of incentive to invest, and little disincentive; in a weak economy, drop it significantly (10%, say, and then another 10% six months later, perhaps) in order to stimulate investment.

Allowing it to be set (within a range) by the Fed would give an at least somewhat nonpartisan group the ability to quickly respond to economic changes, without going through the partisan BS that is Congress.

[Ben Kenobi]

This explains why the income of middle class Americans hasn't gone up since the 70's.

And raising the capital gains tax is going to help them? I don't see how.

The same people who employ these folks are the ones who are hit high by increases in the capital gains.

[snoopy369]

Do you know what raising or lowering the CGT will accomplish, Ben?