5/10/2008

Capital Gains and the Obama Effect

On Thursday, Hugh Hewitt played some clips of Barrack Obama, including one about his desire to raise the Capital Gains tax (At ~31:00). Obama tried to brush it aside as a "phony argument" by saying that it wouldn't affect regular folks, since their 401ks aren't subject to the Capital Gains tax upon withdrawal, and that only the wealthy who own stock will be affected, and besides they "can afford to pay a little bit more".

This whole argument shows great ignorance about the reality of how the market works, and follows the normal liberal economic delusions.

First, not just the wealthy own stocks in this country Mr. Obama. I am hardly wealthy, but I own stock outside of my retirement vehicles.

Second, those regular folk who have IRAs and 401ks *will* be affected by this tax hike. Not by paying the taxes, but by suffering the market losses that will occur when this plan is passed. Not to mention the wider effect on the overall economy.

What do you think is going to happen between the time legislation is introduced and it would receive the signature of the President (no matter whom)? The market is going to drop. Individuals, corporations, investment houses, etc are all going to lock in gains that they have on their stock positions at the lower tax rate. This will have the overall effect of causing the market to go down.

In fact, yesterday on Hugh's show Larry Kudlow said this had already happened. The days following what appeared to be Obama's sewing up of the Democratic nomination, the markets were chattering about his tax plans, and the market dropped. Listen here (~10:25).

Now I am a big believer in the markets, and know that even if this were to happen, they would come back over the long term. But if Obama wants 'middle class people' to prosper, then he should not mess with the Capital Gains tax. It will hurt the market and people's portfolios in the short to mid-term, and discount all future earnings for the long term.

If he really wants to raise more tax money, then perhaps he should consider lowering the Capital Gains rate....



Please Barack, leave well enough alone....

5 comments:

izengabe said...

For Obama to say that "regular folks" with 401ks and IRAs won't be effected by a hike in the capital gains tax shows a complete lack of understanding of how markets and economics work.

One of the reasons why markets tend to rise when capital gains rate is lower than the income tax rate is you are creating a tax incentive to invest in equities rather than fix income.

If you take a risk and make a 5% profit on an investment in stocks you pay a tax rate currently at 15%. If you made the same 5% in a CD or bond you would pay taxes at ordinary income which could be anywhere from 28% to 36%.

So a $10,000 profit from a capital gain would generate an after tax rate of return of $8,500 while a $10,0000 in income from a taxable bonds would generate an after tax rate of return anywhere from $6,400 to $7,200 (depending your tax bracket)

If Obama raises the capital gains tax back to 28% many investors might decided to take money out of riskier equities and re-invest it in safer CDs and bonds.

After all why take a risk of a loss on a stock investment when my after rate of return might be the same as that in a safer fix income investment.

By raising the capital gains tax rate Obama would make investing in stocks less attractive. This will most likely cause investors to move money out of stocks and into fix income. As they do this the stock market would decline in value which will in turn hurt the over all value of the stock investments that Obama's "ordinary folks" own in their 401Ks and IRAs.

For a man who wants to be President not to understand how this basic principal of economics works is kind scary.

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