Obama Outdoes Clinton on Capital Gains

President Clinton Signs
1997 Balanced Budget Act

The president is proposing to raise the most important rates higher than Clinton had them.

Phil Kerpen, Contributing Author: President Obama likes his Clinton nostalgia — he has told the American people his tax increases are a return to the policies of the booming Nineties. It is ironic, therefore, that Obama insists on actually reversing one of the most critical economic successes from the Clinton years: the capital-gains tax cut. Before Clinton signed the 1997 budget deal, the capital-gains rate was 28 percent, and with Clinton’s approval of the cut it fell to 20 percent; Obama now insists on raising it to 23.8 percent, undoing not just Bush’s capital-gains-tax cut but almost half of Clinton’s, too. Such a move would undermine the fragile economic recovery while being unlikely to raise any federal revenue.

Investment taxes amount to double taxation — taxation on income that has already been taxed. When you earn income, it is taxed; if you then spend it on consumption, there is no additional layer of federal tax. If you instead choose to save and invest, the federal government layers on several more taxes: a corporate tax, capital gains and dividend taxes, and — if you still have something left — the death tax.

There are major economic consequences to improving or worsening the tax treatment of investment. Consider what happened when Clinton signed the capital-gains tax cut in 1997. Revenues from this tax climbed from $62 billion in 1996 to $110 billion in 1999, while the federal budget moved from deficit to surplus. The Dow Jones rose from 7,000 to 10,000 points in the three years following the rate cut, while the stock of venture capital — the seed corn of technological innovation — soared from $10 billion in 1996 to $53 billion in 1999. The number of firms receiving venture-capital funding climbed from 2,004 to 5,450 over this period. Overall GDP growth was over 4 percent year-on-year.

And these economic successes did not merely follow, but were in part the result of, Clinton’s capital-gains cuts. That’s because capital formation is critical to improved productivity and, therefore, to GDP and real-wage growth. And just as cuts to capital-gains taxes are a critical supply-side economic booster, investment tax hikes have a profoundly negative economic impact. If Obama achieves his goal of allowing the capital-gains rate to rise to 23.8 percent (a 20 percent statutory rate plus the 3.8 percent Obamacare surtax slated to take effective January 1) and the dividend tax to rise as well, the economic consequences would be more severe than if the top marginal income-tax rates were raised.

Former Reagan-administration economist Steve Entin simulated several tax scenarios that he presented in testimony to Congress earlier this year. Entin found that keeping capital-gains and dividend taxes at 15 percent while raising income-tax rates for the top two brackets to 36 percent and 39.6 percent would reduce GDP by 0.47 percent, reducing projected federal revenue from the tax hike by about 40 percent. On the other hand, he found that keeping the top income-tax rates at 33 percent and 35 percent — as Speaker Boehner is fighting hard to do — but allowing the tax rate on capital gains and dividends to rise to 23.8 percent would reduce GDP by 2.1 percent, reducing projected revenue by more than 100 percent. In other words, the economic damage would be more than four times greater than the damage that the income-tax hikes would create. The government would get less revenue, not more.

The most important element in any tax policy is to move toward the proper economically neutral base, which means minimizing the punitive double or triple taxation of savings and investment. Yet even with the Obamacare surtax on investment income already impending, Obama is insisting on additional investment-tax hikes in the fiscal-cliff negotiations.

To protect the U.S. economy, Republicans must hold the line on investment taxes and insist on holding Obama at least to his promise of Clinton-era rates — which for capital gains is a maximum of 20 percent, not 23.8.
--------------
Phil Kerpen is the president of American Commitment; a columnist on National Review Online where he first shared this article, and the author of Democracy Denied: How Obama is Bypassing Congress to Radically Transform America – and How to Stop Him. Phil Kerpen is a contributing author for the ARRA News Service.

---

Tags: Phil Kerpen, Barack Obama, Bill Clinton , taxes, Clinton era tax rates, capital gains, To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. Thanks!