A Reasonable Price to Pay?

2008 Democratic primary debate in Philadelphia, April 16, 2008: on Tax Reform

Barack Obama: Raise capital gains tax for fairness, not for revenue

Q: You favor an increase in the capital gains tax, saying, “I certainly would not go above what existed under Bill Clinton, which was 28%.” It’s now 15%. That’s almost a doubling if you went to 28%. Bill Clinton dropped the capital gains tax to 20%, then George Bush has taken it down to 15%. And in each instance, when the rate dropped, revenues from the tax increased. And in the 1980s, when the tax was increased to 28%, the revenues went down.

A: What I’ve said is that I would look at raising the capital gains tax for purposes of fairness. The top 50 hedge fund managers made $29 billion last year–$29 billion for 50 individuals. Those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.

Q: But history shows that when you drop the capital gains tax, the revenues go up.

A: Well, that might happen or it might not. It dpeends on what’s happening on Wall Street and how business is going.

Source: 2008 Philadelphia primary debate on eve of PA primary April 16, 2008.

In our last blog, we mused about tax policy and posited the question, “Should tax policy be designed to eliminate income disparities, or to maximize government revenues?” As the debate question reproduced above suggests, Senator Obama counseled that tax policy should be guided by issues of “fairness.” The moderator noted that when capital gains tax rates were raised in the past, tax revenues declined. When rates were lowered, tax revenues increased.

Okay. So perhaps this question should be put to voters in terms of a referendum. It could read: “Given that polls suggest that the US Federal budget deficit is a top concern to you, do you still feel that it is more important to focus on tax fairness, or revenue maximization, in the current environment?”

Before answering, they should be advised of the outcome as asserted by the moderator to the debates: An increase in the capital gains rate could lead to lowered tax collections and then the goal of deficit reduction would, by necessity, have to be accomplished by further cutting spending – entitlements and defense alike.

Is this a reasonable price to pay?

We would be interested in our own clients and friends response. Please let us know what you think.

Robert M. Bilkie Jr., CFA