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A Looming Political Prosecution

Obama At A Big Loss Over Capital Gains

The opinions expressed by columnists are their own and do not necessarily represent the views of

WASHINGTON -- When ABC News anchor Charles Gibson questioned Barack Obama in the April 16 Democratic presidential candidates' debate about the freshman senator's plan to raise capital gains tax rates, he told Obama it would bring in less revenue, not more.

Gibson repeated this little-known fiscal reality throughout his exchange with Obama (probably the first time a network anchor has ever uttered this fact in a presidential debate). But the Democratic presidential frontrunner remained unmoved by the certainty that raising this tax on millions of investors, homeowners and other ordinary people would worsen the budget deficit.

Obama did not disagree with Gibson's premise. Instead, he pointed to a relatively small number of hedge fund managers whom he said make millions, maybe billions, and who paid a tax on their gains that could be lower than the tax rate paid by their secretaries. He did not mention that if secretaries had a gain on the sale of assets such as stock -- and more than 50 million Americans own stocks -- they would pay the same capital-gain rate too.

But Obama dodged the tax-revenue problem Gibson raised, as well as the larger issue of using the tax code to encourage capital investment in the economy to stimulate business expansion, job creation and economic growth. The fact is that whenever the capital gain tax rate has been cut, it brings in more tax revenue to pay the government's bills, and when it is raised it brings in less. Why? More people are encouraged to take advantage of the lower rate and sell assets such as stocks when they can pay a smaller share to the feds. When the rate is raised, many tend to hold their assets to avoid paying a bigger chunk of any gain to the government. That's why every cut in the capgain rate has been followed by a sizeable rise in revenue, as Gibson pointed out.

Obama would not say how high he would raise the capital gains tax, but he has vowed to increase it along with the top income tax rate as part of a extensive string of tax increases to bankroll his ambitious social-welfare spending agenda. The Illinois lawmaker, who has been in the Senate little more than three years, isn't into growth economics. When he talks about taxes, it is in terms of "fairness" -- even though the top 10 percent of income earners pay most of the income taxes -- and reducing the deficit.

But the fastest way to boost federal revenues is to cut taxes, which in turn strengthens economic growth. When President Kennedy's tax cuts were enacted in the early 1960s, government tax revenues rose as the economy grew at a faster rate, yielding a budget surplus by the end of the decade. Ronald Reagan's tax cuts in the 1980s led to higher tax revenues as well, and also stimulated an economic boom that led to a 20-year bull market. The budget surplus and economic surge in the late 1990s under President Clinton came after the Republican Congress got him to cut the capgains rate, which led to an explosion of investment in the technology industry. The Bush income tax-rate cuts in this decade, including a lower capital gains rate, similarly pushed federal revenues to new highs and in the process slashed a projected deficit in half.

We're going through an economic rough patch now, but throughout this decade the entire economy grew from about $12 trillion to $14 trillion. Notably, John McCain thinks raising taxes on businesses (including small businesses who pay taxes at the top rate that Obama would impose), would weaken our economy even further.

Last week he laid out an economic-growth plan that would follow in the footsteps of Kennedy, Reagan and Bush. Among its provisions: the abolition of the alternative minimum tax (AMT) that would be largely paid by 25 million middle-income families; the doubling of the personal tax exemption for dependents from $3,500 to $7,000; the cutting of the estate tax by raising the tax exemption on estates up to $10 million and lowering the tax rate to 15 percent; the decrease of the federal corporate tax rate to 25 percent from 35 percent, (the second highest corporate tax rate among the world's industrialized countries); the overhauling of the tax code to make the system fairer, flatter and simpler, with an alternative tax system of no more than two tax rates with a generous standard deduction; and the retention of lower tax rates on capital gains and dividends to spur savings, investment and venture-capital formation, in the interest of business and employment expansion.

Over the past seven years, Democrats have been condemning the Bush tax cuts "for the rich" when those tax cuts reduced rates across the board from lower-income Americans to those at the top of the income scale. But Obama and Hillary Clinton said something in last week's debate that may not be widely known among most Americans: they would keep all the Bush tax cuts for taxpayers making less than $250,000.

Sounds like they're saying that almost all of Bush's tax cuts were a good idea to begin with.

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