By: Ralph Wilbur – December 2012
The difference between the tax rate on earned income versus the rate on income generated from capital gains has lent some success to Obama’s “envy the rich” campaign.
It has given Democrats the edge in demagoguery by implying that millionaires like Warren Buffett get taxed less than their secretaries. Never mind that Warren Buffett’s total tax in actual dollars is likely several thousand times as great as his secretary’s. That will be skipped over, but they will emphasize that the percentage of tax on his income is less than his secretary’s.
On its face, as a 15 second sound byte, without any explanation why there is this difference, it sounds so unfair.
There are valid reasons for this difference in taxation rate. These reasons are connected to job creation. Taxing capital investment at lower rates encourages savings and investment, the lifeblood of economic growth and full employment. Also, it keeps the wealthy investing instead of seeking tax shelters for their income and savings.
Discretionary savings of earned income, already taxed once, then invested in stock or a family business is taxed again if it is successful or lost completely if unsuccessful. Presently all gains from investments are fully taxed , but all losses are not fully deductible. The lower capital gains tax rate partially compensates for this.
When anyone takes their hard earned money and invests it to start a business or purchase stock to help existing companies expand their businesses, they take the risk of losing it all, or a good part of it. This is the kind of risk taking we want our tax rates to encourage to create new and stronger businesses. Lower tax rates on capital gains income provides a greater incentive to take such risks. Economists’ studies have documented this.
Additionally, Obama’s first Chief Economic Advisor, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects and might raise steady-state output by as much as 18% and consumption by 16%.”
He asserted that – “Keeping taxes low on investment is crucial to economic growth, raising wages and job creation.” It would appear that for President Obama, vote getting opportunities, creating envy, trump policies that are in the best interest of creating jobs.
Obama’s ads attacking the difference between Warren Buffet’s capital gains tax rate and his secretary’s earned income tax rate well serves a strategy to generate class warfare and garner votes, but it flies in the face of the President’s own, pre campaign, adviser’s thinking which suggests that Mr. Buffet’s present capital gains tax should be lowered even further to encourage private investment and job growth.