President Obama just told the country during his State of the Union address that he is going to increase the capital gains rate again in order to raise revenue for new spending programs. Given that Obama already knows that raising the capital gains rate actually REDUCES revenue, we are left with a President who believes that we can pay for increased spending by reducing revenue. He acknowledged this in 2008 during a televised debate against Hillary Clinton, but went on to state that rates should be hiked – despite its effect of reducing revenue – because it was more “fair” taxation (ludicrous, but a subject for another day).
Extraordinarily and equally disappointing about this fundamental economic error is that no one in the major press outlets, on the day after the State of the Union speech, pointed out the President’s gaffe. Do we really have a President who pushes for paying for increased spending projects with policies that reduce revenue? Or do we have a President who puts forth an initiative that he knows has very little chance of realization, but chooses to do so anyway so he can characterize the Republicans as protecting the wealthy while he can claim to protect the middle class? And did he believe that the press was so clueless that they would not laugh at him the following day?
Capital gains are unusual in that the taxpayer has the ultimate decision as to whether and when to sell his asset (stock, his business, a work of art, etc.) The higher the tax rate, the LESS likely he is to sell, seeing as he will only be able to enjoy or reinvest what is left of the proceeds AFTER TAX. History has borne this out – capital gains tax collections go down in the periods after increases, and go up in the years after decreases.
The actual impact of raising the capital gains rate is also devastating to the economy. By discouraging the sale of assets, there is reduced capital available for new projects and opportunities, reducing job creation and wages, and resulting in lower revenue collection.
Furthermore, with higher capital gain rates, the expected after tax rate of return on new projects will go down, assuring that fewer of them will go forward.
Additionally, there are a number of localities, like the state of California and New York City, which have tax rates of 12% or more and also a large concentration of wealthy people and high performing businesses. Couple that with the proposed increase to the federal capital gains rate and you could see total capital gains rates of more than 44%, A capital gains rate this high would virtually bring elective capital to a standstill. This would amount to a rate more than twice the rate during the Bush Administration (15%) – when growth and the economy were very strong..
Raising the capital gains rate will put a stranglehold on risk taking and available capital. Why sell an asset to fund further investment and opportunity when the government takes a large share of the gain with the loss remaining all yours. It makes virtually no economic sense to do so, and the result means an already anemic economy will continue to struggle.
If you plan to tune in tonight to the State of the Union, I’ll be running an Open Thread over at Bearing Drift, Virginia’s premier conservative media group. Join me over there at 8:45 to discuss Obama’s proposals.
The main theme of the evening is “middle class economics”. These include:
–raising “$320 billion over the next 10 years in new taxes targeting wealthy individuals and big financial institutions to pay for new programs designed to help lower- and middle-income families”.
–raising the capital gains and dividend tax rates to 28% on some higher earners
–creating a “fee on the liabilities of about 100 big financial institutions”
–tax credits to small businesses to help “cover costs” of requiring “employers without 401(k) plans to make it easier for full-time and part-time workers to save in individual retirement accounts”
–expanding tax credits for child child care
—expanding paid sick leave and “to fund Labor Department feasibility studies on paid leave”
—providing two years free of community college tuition for up to 9 million students
There are two important fiscal dates coming up in February: February 12 and February 15.
February 12 is the scheduled date of Obama’s State of the Union speech, which is also Lincoln’s birthday.
It also happens to be three days before the “X Date”, February 15, the estimated date that the Treasury may not be able to pay its bills. The debt ceiling deadline.
Does anyone want to speculate as to whether the President of the United States is going to announce during his State of the Union Address that he will be unilaterally bypassing Congress to raise the debt ceiling?
Picture the all-too-familiar scenario: it’s February 12th, and Congress will be deadlocked over raising the debt ceiling, cutting spending, raising taxes, and sequestration scenarios. We know that there will be no decision by then, because deadlines mean nothing in Congress – as we just witnessed with the fiscal cliff debates running down to the wire.
“In the event that Republicans make good on their threat by failing to act, or by moving unilaterally to pass a debt limit extension only as part of an unbalanced or unreasonable legislation, we believe you must be willing to take any lawful steps to ensure that America does not break its promises and trigger a global economic crisis — without congressional approval, if necessary”
Can Obama do this? That’s up for debate, as both sides of the aisle have given their evidence for or against such a move.
But wait. Does anyone remember the “We Can’t Wait” policy implemented by Obama in the fall of 2011, following the last debt ceiling showdown? The White House describes the program:
“President Obama is not letting congressional gridlock slow our economic growth. Without a doubt, the most urgent challenge that we face right now is getting our economy to grow faster and to create more jobs…. we can’t wait for an increasingly dysfunctional Congress to do its job. Where they won’t act, I will.”
The narrative is being shaped. We have Obama’s program “We Can’t Wait” in place. According to the whitehouse.gov , Obama has issued 45 Executive Orders under this program. Couple the program with Reid’s letter, the time frame for the State of the Union and the potential default of the Treasury, and you have a perfect storm.
Be prepared. Be prepared for Obama to trot out imagery, language and ideas from Lincoln and work them into his State of the Union address as a backdrop to an announcement on the debt ceiling. Obama can, and will, propose that “We Can’t Wait” for Congress to act (or not act) on a potential default – since it is certain they will be gridlocked – and will use an Executive Order lifting the debt ceiling limit. This will change the ensuing discussion on taxes, spending, and sequestration. But will it also change forever the nature and function of the presidency?
During the State of the Union, we heard President Obama talk repeatedly about fairness and taxes as he painted a picture of income inequality. The problem is that income inequality really is a myth, yet it is being perpetuated: the gap between rich and poor has never been higher.
The data used most frequently to substantiate this claim is a Congressional Budget Office (CBO) report from October 2011. However, the glaring problem with this report is that it only covers the period from 1979 to 2007 — ending right before the Great Recession. Convenient?
So in November, Ron Schmidt of the University of Rochester School of Business Administration, did an analysis of the CBO data and compared it to IRS data during the same time period — but through the year 2009, the latest year for which IRS data was available. He found something very, very different. In a reported summary,
According to IRS data, which extend through 2009, the average nominal Adjusted Gross Income (AGI) for filers with AGI of at least $500,000 declined by 17.8 percent from 2007 to 2009, and their average after-tax income declined by 19.9 percent. For those with AGI of less than $500,000, AGI declined by only 2.6 percent, and after-tax income declined by only 1.5 percent. These numbers certainly do not indicate an increase in income inequality.
In fact, there has been a marked decline in income inequality over the last decade. From 2000 to 2009, average AGI declined by 15.0 percent and average after-tax income declined by 11.0 percent for returns with AGI of at least $500,000. (Filers with an AGI of at least $500,000 represent 0.5 percent of all returns in both years, so this comparison is similar in spirit to the CBO report, which looks at the top 1 percent of households.) For all other returns, there were increases of 14.6 percent for average AGI and 17.3 percent for average after-tax income.
It revealed that income inequality is not only not at an all-time high, but also, due to the nature of economic and business cycles, it is relatively the same as it was twenty-five years ago.
The repeated calls for fairness last night reminds one of Margaret Thatcher’s famous speech in front of the House of Commons where she lambasted her opposition for suggesting that the gap between rich and poor had widened. The Prime Minister People responded that “people on all levels of income are better off than they were in 1979. The honorable gentleman is saying that he would rather that the poor were poorer, provided that the rich were less rich. That way one will never create the wealth for better social services, as we have. What a policy. Yes, he would rather have the poor poorer, provided that the rich were less rich. That is the Liberal policy”.
Liberal policy indeed is alive and well in America today. Thankfully, income inequality is not.
Though Obama may be pretending to draw a line in the sand between himself and the Republicans, he is really drawing a line for voters: Them vs The Rich Guy (millionaires and billionaires, anyone?) Setting up the narrative in the State of the Union allows Obama to pander to the electorate during this campaign season and relentlessly go after those who have proven to be successful as a source of increased tax revenue to cover his spending problem.
#1) ON TAX BREAKS FOR THE WEALTHY: “And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break. It’s not a matter of punishing their success. It’s about promoting America’s success”.
FACT: The highest-income earners are the greatest investors. Investment is much more stimulative than consumptive spending; raising the tax margin punishes the earners and the economy – while theat extra revenue will go straight to the government. These top 2% earners also provide nearly 50% of small business income in this country; by targeting them, Obama is also hurting businesses.
#2) ON FIXING THE TAX CODE: “Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world”
FACT: This is purely populist rhetoric. Accountants and lawyers do not eliminate tax liabilities. And it is not so much lobbyists as it is legislators pandering for votes who put in provisions intended to help their own individual special interests. This happened in the 1986 Tax Act under Ronald Reagan, when tax rates from 50% to 28% in exchange for a large number of deductions and writeoffs. However, the ink was barely dry when Congress used that as an opportunity to jack the rates up from 28% to 39.6% — which lasted until the Bush tax cuts pushed them back a little bit.
#3) ON A FEDERAL FREEZE FOR FIVE YEARS: “I am proposing that starting this year, we freeze annual domestic spending for the next five years. This would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was president”.
FACT: Obama’s federal freeze comes after he has increased our spending 25% in two
years. We need to go back to FY2008 and start from there.
#4) ON JOB CREATION: “We’ll invest in biomedical research, information technology, and especially clean energy technology – an investment that will strengthen our security, protect our planet, and create countless new jobs for our people”
FACT: “Invest” is just code for increased government spending. Here’s an example of the government picking industry winners and losers, something they have no business – or qualifications – doing. This policy will result in a net job losses – taking away from market directed companies in order to subsidize activities that cannot justify investment by the free market. A better and more impacting idea would be to give businesses research credits that companies could use and develop on their own.
#5) ON CLEAN TECHNOLOGY: “Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling. So tonight, I challenge you to join me in setting a new goal: by 2035, 80% of America’s electricity will come from clean energy sources. Some folks want wind and solar. Others want nuclear, clean coal, and natural gas”.
FACT: There is no clear consensus on the best type of clean energy. This only means continued uncertainty in the business markets, which will hamper the rate of recovery.