President Obama today called on raising the capital gains tax rate: “…Explain why somebody who’s making $50 million a year in the financial markets should be paying 15 percent on their taxes, when a teacher making $50,000 a year is paying more than that — paying a higher rate.”
 

25% capital gains tax rate?  Under one interpretation, President Obama is calling for the marginal tax rate on capital gains to be the same as the marginal tax rate on someone earning $50,000 per year.  This would imply a 25% capital gains tax

28% capital gains tax rate?  According to theladders.com, a Fortune 500 CEO’s executive assistant commands a starting salary of about $100,000.  The marginal tax rate on this salary level is 28%.  So, President Obama might be calling for the capital gains tax rate to get back to its pre-1997 level of 28%

39.6% capital gains tax rate?  President Obama laid out the principal that capital gains should not be taxed any lower than any other tax rate.  If Warren Buffett’s secretary gets a big raise that puts her in a higher tax bracket, President Obama and Mr. Buffett would have the same complaint.  If President Obama means that he wants to tax capital gains as ordinary income (as seems most likely), he would have to raise the rate all the way to 39.6 percent, the level it will be in 2013 and which he has said is the best top rate.

President Obama has already raised the capital gains tax rate.  President Obama has endorsed a 20% capital gains marginal rate in his budget.  In addition, Obamacare contains a 3.8% “surtax” on capital gains and other investments starting in 2014.  President Obama went into today’s speech backing a 23.8% capital gains tax rate, and he called for an even higher rate than that.

Raising the capital gains tax rate is a lousy way to “soak the rich.”  In 1986, the capital gains tax was raised from 20 to 28 percent.  Capital gains revenues fell from $53 billion to $34 billion.  By contrast, when the capital gains tax was cut from 28% to 20% in 1997, capital gains tax revenues rose from $79 billion to $89 billion, even at the lower rate.  A similar thing happened in 2003 when the capital gains rate was cut from 20% to 15%--tax revenues from capital gains rose from $51 billion to $73 billion.  If you tax something more, you get less of it; if you tax something less, you get more of it.

What do you think President Obama wants the capital gains tax rate to be?  Will it work to increase tax revenue?

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Posted by Ryan Ellis on Monday, September 19, 2011 5:10 PM EDT

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