Tuesday, September 30, 2008

Reader Mailbag: Capital Gains Taxes Under Obama

A reader writes in the following:

Hello, just wanted to see what an economist's take on Obama's tax plans, concerning capital gains rates.

I'm reading message board postings from people who say they're small business owners who claim that Obama's tax plans would ruin them, that raisingthe CG rate would cause them to have to lay off their staff, etc. They otherwise seem to be GOP partisans who I wouldn't expect to vote for Obama whether or not they owned small businesses. I don't really think Obama wants to ruin businesses the way it's being made out to be by some (including Steve Forbes), so what would you say the real effects would be?

I'm an independent voter undecided but having whittled my choices down to Obama or a third-party candidate. Thank you for your feedback.

The premise--that Obama proposes to raise capital gains taxes on small business owners--is false. Here are various excerpts from his advisors' description of his proposal in the Wall Street Journal:
Sen. Obama also recognizes that small businesses are the engine of job growth in the economy. That is why he is proposing additional tax cuts, including a tax credit for small businesses that provide health care, and the elimination of capital gains taxes for small businesses and start-ups. The vast majority of small businesses would face lower taxes under the Obama plan than under the McCain plan.
Regarding capital gains taxes more generally, there's this from the same article:
- The top capital-gains rate for families making more than $250,000 would return to 20% -- the lowest rate that existed in the 1990s and the rate President Bush proposed in his 2001 tax cut. A 20% rate is almost a third lower than the rate President Reagan set in 1986.
And the crucial overall point:
His plan would not raise any taxes on couples making less than $250,000 a year, nor on any single person with income under $200,000 -- not income taxes, capital gains taxes, dividend or payroll taxes.

Overall, tax rates on capital gains would be lower than they were during the economic growth glory days of the 1990s. The country's economic performance has been far worse during the Bush years, when lower capital gains rates were introduced. More sophisticated analyses of the effects of capital gains rates on economic growth have not found any relationship and estimates from the Congressional Budget Office suggest that even a substantial change in the capital gains tax would have an imperceptible effect on GDP, on the order of a couple hundredths of one percentage point after ten years.


Anonymous said...

Mr. Obama, small businesses don't pay capital gain taxes. They pay income taxes.....good GOD we are in for a rude awakening should this man get into office...

Anonymous said...

don't forget about the proposed elimination of capital gains for entrepreneurs and angel investors:


"Eliminating Capital Gains Taxes for Entrepreneurs and Investors in Small Business. Barack Obama
understands that small businesses are the engines of our economy, and he will eliminate all capital gains
taxes on investments in small and start up firms."

To me, it's basically an extension of the existing capital gains rollover for qualified small businesses.

Don Pedro said...

Of course the small businesses themselves don't pay capital gains taxes, but their owners do, and that's obviously what we mean when we talk about capital gains taxes and small businesses. Likewise, most small businesses--proprietorships, partnerships, and S-corps--don't pay income tax, but their owners pay taxes on the income.

Matt said...

These points seem to be excuses for raising capital gains taxes. Could you provide some reasons why raising the capital gains tax would be good?

Don Pedro said...

The only reason to raise any tax, or to have taxes at all, is to increase revenue. Increasing the capital gains tax from 15% to 20% would allow Obama to fund reductions on taxes on wages .

Anonymous said...

A Small Business owner ONLY pays capital gains tax when he SELLS his business at a profit. During normal business years he pays income taxes. This is quite a difference. Only folks who lend money to someone to start a business would get the benefit of a capital gains tax cut on their investment while the business is active.