Obama, Capital Gains and Economic Growth

The New Commander-in-Chief Can Be grateful that not one American died in Iraq last month.

The new Commander-in-Chief can be grateful that not one American soldier died in Iraq last month.

According to a front page analysis in yesterday’s “Washington Post,” many of the lawmakers I most admire are going to lose tomorrow. I will be especially saddened if Senators such as Norm Coleman (MN), Gordon Smith (OR), John Sununu (NH) and Elizabeth Dole (NC) are defeated. All of them are “work horses,” not “show horses,” and they were willing to compromise for the common good. My guess is that their successors will be intense partisans. Lets hope I am wrong.

I have been wrong in the past.  Several of the predictions I made about President-elect Bill Clinton in 1992 were not correct. Of course, it can be argued that a big part of his success was due to the GOP Congress which was in power for six of his eight years in office.  Nevertheless, I would not have predicted the Clinton Administration would have focused on deficit reduction, welfare reform, free trade agreements such as NAFTA, and capital gains reductions.
In 1997, in one of his best moments, President Clinton signed the law reducing capital gains rates from 28 to 20%.  One of the results was growth rates of 4% for the next three years, and Nasdaq quadrupled in value.  (George Bush later took the rate down to 15%).  Unlike today, Clinton’s advocacy of significant capital gains reductions was an integral part of the 1996 Democratic Platform. Clinton used this repeatedly to rebut Bob Dole’s tax cut arguments during his re-election campaign. In his memoirs, Clinton himself said he could have been described as a liberal Republican.
Today, my predictions about Senator Obama could be similarly incorrect.  Last month not one American solder died in Iraq, and similar to 1992, every survey indicates the economy is the dominant issue.  Obama has repeatedly said he will cut taxes on the middle class, but I believe just the opposite will happen. The capital gains rate is crucial to investment decisions and it is already scheduled to increase from 15% back to the 20% of the Clinton era. The dividend rate will go back to 30 or 38%.  Obama will not do anything to reverse that.
This is a major factor because over half of us own stocks and almost 80% own homes. Surprisingly, one of the few couples not investing in the stock market is Barack and Michelle Obama.  In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% came from households with incomes below $100,000.  The increase will also put America at a great disadvantage when competing for global capital.
In addition, I really hope Obama will rethink his position regarding an additional raise beyond 20% in rates on capital gains.  He wants to do this out of sense of “fairness,” and Obama calls for elimination of “tax breaks for the rich.”  Obama would only be hurting low income workers. He would be reducing the amount of capital necessary to create jobs.
There is a great disparity in income in our nation, but the only way to help a blue collar worker earn more is through increased capital and training. As Jesse Jackson once said, “Capitalism without capital is just another ‘ism’.” The rate reductions made by Clinton and Bush both resulted in more income to the government, but the real benefit was for our nation’s economic growth.
American companies also have to endure the highest corporate tax rates in the industrialized world, and this will not change in an Obama Administration.  
Our current corporate rate is 39.3% and even Germany has a 25% rate.  Ireland cut its corporate rate to 12.5 percent and went from being the poor man of Europe to the second-richest on a per capita income basis.  Despite Senator Obama’s comments about spreading the wealth around, we already have an extremely progressive income tax system.  For 2006 (the latest year for which statistics are available), the share of the federal income tax paid by the top 1 percent of tax returns reached an all-time high — 40% of all federal income taxes.  The top 50% paid 97% of the tax.  The bottom 50% paid only 3% of it.
I was pleasantly surprised by several of Bill Clinton’s policies, and I hope I will be able to say the same thing about Barack Obama.

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