It looks like Obama has changed his stance somewhat on the capital gains tax.
What is the capital gains tax? This is the tax on profits in capital instruments (stocks, bonds, etc) that is sold at a higher price than it was bought for.
What this does is diminish the incentive to invest in capital assets, like stocks, because it means that the US government will be taking a cut of the pie. How big a cut? Currently, the capital gains tax is 15%. Obama has talked before about increasing this, perhaps even doubling it to almost 30%. That's a pretty big slice.
From a CNBC interview:
BARTIROMO: "How do you plan to change the tax code when it comes to capital gains? How high will that 15 percent rate go?"
Sen. OBAMA: "Well, you know, I haven't given a firm number. Here's my belief, that we can't go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was the 28 percent. I would--and my guess would be it would be significantly lower than that. I think that we can have a capital gains rate that is higher than 15 percent. If it--and if it, you know--when I talk to people like Warren Buffet or others and I ask them, you know, what's--how much of a difference is it going to be if it's 20 or 25 percent, they say, look, if it's within that range then it's not going to distort, I think, economic decision making. On the other hand, what it will also do is first of all help out the federal treasury, which is running a credit card up with the bank of China and other countries. What it will also do, I think, is allow us to make investments in basic scientific research, in infrastructure, in broadband lines, in green energy and will allow us to give us--give some relief to middle class and working class families who have been driving this economy as consumers but have been doing it through credit cards and home equity loans. They're not going to be able to do that. And if we want the economy to continue to go strong, then we've got to make sure that they're getting a little relief as well."
The capital gains tax diminishes the incentive to invest. Remember, investing is tantamount to foregoing consumption today in order to be able to consume more tomorrow. When people are discouraged from investing, they will invest less, causing less capital gains revenue. This line of reasoning leads some to believe that cutting the capital gains tax always results in increased revenue, a theory that isn't confirmed.
Although it looks like the tides of primary politics has caused Obama to change his mind, I must question Obama's concern about "fairness" here when it comes to increasing this tax. I guess I just don't see what's fair about it. An Obama administration that intends to takes energy challenges seriously, for instance, will require the country to move towards conservation (to cut demand) and research/production (to increase clean supply). Each of these require investment.
I don't claim to be any particular kind of expert on this, but I'd be interested to hear peoples' thoughts in the comments.
