Yesterday, I kicked off my Financial Facts About Barack Obama series by writing about the effect of Obama’s proposal to let the Bush tax cuts expire.  As I said yesterday, this guy has no idea how disastrous such a proposal would be for the economy and for business.

Obama’s monetary policy consists of two other major items: raising long-term capital gains taxes and raising Social Security taxes.  Today I want to focus on Obama’s proposal to increase the long-term capital gains tax rate from 15 % to 25-28 %.

Raising The Long-Term Capital Gains Tax

The long-term capital gains tax rate applies to an asset that you hold for more than one year.  Thus, if you purchase a share of stock today and sell it in August 2009, your gains (if any) are subject to the long-term capital gains tax rate.  That rate is currently 5 % for taxpayers in the 10 % and 15 % tax brackets and 15 % for taxpayers in the 25 %, 28 %, 33 %, and 35 % tax brackets.  Thus, the latter 15 % rate is the one that applies to the majority of Americans.   

Facts About Barack Obama picture 2Obama has stated that he will advocate increasing the long-term capital gains rate from 15 % to 25 % or 28 %.     

Who Does This Tax Increase Affect?

This tax increase affects mostly anyone who owns stocks.  It also applies to real estate investments, but I’ve already explained how you can avoid paying capital gains taxes on your rental properties.

Effect Of Raising The Long-Term Capital Gains Rate

Raising the long-term capital gains tax rate would have several devastating consequences: (1) decrease in federal tax revenue; (2) the move towards a system that doesn’t work; (3) penalizing the middle class; (4) punishing success in general; and (5) inhibiting economic growth.

1) Decrease in federal tax revenue. 

Scott Wainner (of WRevenue.com, one of my favorite blogs) writes in his post about Obama’s cluelessness that, twice in history, increases in capital gains rates have decreased tax revenues, and decreases in capital gains rates (under Bill Clinton and George W. Bush) increased tax revenues.  He uses a helpful chart to support this statement.  The numbers don’t lie.  Simply increasing taxes doesn’t always lead to a corresponding increase in federal tax revenue.   

2) Fairness cannot be imposed or regulated.

Obama insists that, although a capital gains tax hike won’t produce more tax revenue, the rate nevertheless must be increased for “fairness.”  That sounds like socialism to me.  The attempt to redistribute wealth via this backhanded way of taxing individuals who invest their money is an exercise in futility.  This method has been tried in the past, and it has failed miserably.  Free markets–not government regulation–create fairness.Facts About Barack Obama picture 1  

Enacting revenge on wealthy investors, mutual or hedge fund managers, and business owners effectively penalizes the driving forces of our economy.  Like I said yesterday, no one ever got a job from a poor person.  When people with money are allowed to invest that money, society benefits from expanding businesses, an increase in jobs, and a rise in innovation. 

When you take the gains away from these investors under the guise of “fairness,” you’re imposing a socialist system that punishes business, reduces jobs, and discourages innovation.  And it’s a system that has failed multiples times in our past and across the world.

3) The middle class, not the “wealthy,” are affected.

A major problem with this part of Obama’s tax plan is that it won’t just affect the wealthy (as he so naively thinks).  Instead, it would affect millions of Americans who aren’t wealthy.  As Scott points out, there are 100 Million people in the U.S. who own stock.  In fact, in 2005, 47 % of all tax returns that reported capital gains were from households with incomes below $50,000, and 79 % were from households with incomes below $100,000.  It isn’t just the wealthy who are buying stock.   

4) Punishing success.

For his Harvard education, Obama is an absolute moron on this issue.  Taking a larger chunk of people’s capital gains punishes hard-earned success.  It’s one thing to tax earned income (i.e., what someone earns from a job).  But when you increase the tax on gains people realize from investing (and risking) their hard-earned money (and gains that, by the way, help capitalize businesses and, thus, spur economic growth), that’s another story.

This country has over 300 million people.  Raising long-term capital gains taxes affects ONE-THIRD of that population.  Moreover, of that one-third (or 100 million people), 79 % earn under $100,000.  It’s not just millionaires who will be affected.  It’s middle-class America–a sector that works painfully hard to make ends meet–that will suffer, too. 

I’ve never seen such a concerted effort to wipe out the middle class.  It’s as if we have a communist running for President.  (Do we?)

Taxing middle-class workers for achieving monetary gains in the stock market punishes them for their efforts and wipes out their hard-earned success in the market.  Economic growth depends on rewarding success, not punishing it.

Facts About Barack Obama picture 35) Anti-growth consequences.

Punishing over 100 million investors discourages them from entering the market.  It keeps them from investing their money in the stocks of companies.  In addition, like increased taxes on small businesses, a higher long-term capital gains rate reduces the motivation for entrepreneurs to invest their money in start-up companies or in growing businesses.  The whole point of investing one’s money in a business is the goal of having more cash in your bank account.  Take a bigger bite out of that, and you remove the incentive to invest and innovate.

These additional facts about Barack Obama are problematic.  I don’t think this man truly understands the ramifications of raising taxes across the board.  We may not be in a recession, but we’re certainly in a downturn.  This is not the time to raise every tax in the book.  Doing so (especially hiking the long-term capital gains tax) discourages and destroys investment, risk-taking, entrepreneurship, innovation, and the all-important goal that we so desperately need right now: growth. 

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