09.20.2011 0

Obama’s capital implication

By Bill Wilson — When Berkshire Hathaway chairman and chief executive Warren Buffett wrote his love letter to Barack Obama begging to have his taxes increased — a move that prompted Americans for Limited Government to note up to $1 billion in back taxes his company may owe — he implied that he would be comfortable paying capital gains taxes at a higher rate, and that those gains ought to be treated equally as income under tax law.

Obama capitalized on the Buffett oped in his recent address to a joint session of Congress, saying, “Right now, Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix. We need a tax code where everyone gets a fair shake and where everybody pays their fair share.”

Again, Obama implied that he was gearing up to raise the capital gains tax from its current levels.  He promised that the tax hike would “help the economy grow and get our fiscal house in order,” but it will do neither.  Why?

When you want less of something, you tax it.  More capital gains going to the government will result in less capital gains being reinvested in the economy.  In this case, Obama is essentially calling for less capital to be invested in the U.S. by increasing the government’s share of that capital.

Call it simple math.

Broadly speaking, increasing taxes on capital gains will also have the impact of driving investments overseas where they are taxed at lower rates. Even targeting the tax increase to hedge fund managers, as in the Obama proposal, will simply have the effect of moving those operations offshore.

So, at a time when growth is anemic at little more than 1 percent and unemployment persistently high at over 9 percent, Obama is proposing policies that will result in there being less capital to invest in domestic private markets.  Sadly, for the average American, that will mean fewer jobs available.

Besides driving investment overseas as noted above, White House budget director Jack Lew estimated that treating hedge fund managers’ capital gains for services rendered would raise $18 billion over ten years, or about $1.8 billion every year.

That may seem like a lot of money, but to put it into context, that would account for little more than 1.4 percent of the $1.244 trillion in capital gains tax collections expected from 2011 to 2020 by the Congressional Budget Office.

So, the proposal in a narrow sense will not help whatsoever to “get our fiscal house in order”.  With a deficit of $1.5 trillion, the nation is borrowing at a pace of over $4 billion a day.  Therefore, Obama’s hedge fund manager tax at best will help pay for less than 12 hours of the federal government’s daily borrowing binge.

That makes Buffett’s gambit and Obama’s proposal little more than a political ploy — a clever way to inject class warfare into the debate.  Certainly not a proposal that merits serious consideration for anyone actually interested in finding ways to “help the economy grow and get our fiscal house in order.”

After all, if Obama was serious about fiscal reform, he’d be embracing Senator Tom Coburn’s plan to cut $9 trillion over the next ten years out of the budget, getting us back into the black and balancing the budget this decade.  And if he was serious about growing the economy, tax hikes on job creators would be the last thing on his mind.

Bill Wilson is the President of Americans for Limited Government. You can follow BIll on Twitter at @BillWilsonALG.

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