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Cutting the Capital Gains Tax Boosts Growth Rate and Jobs

The opinions expressed by columnists are their own and do not necessarily represent the views of
WASHINGTON - Former Massachusetts governor Mitt Romney estimates the federal tax rate he pays on most of his income is about 15 percent because it comes from his past investments.

That may sound shockingly low to many middle income Americans who pay tax rates of 25 percent to 28 percent or higher, but the 15 percent is in the federal tax code for a good reason: to encourage capital investment which is the mother's milk of a growing economy.

Romney, who said he will release his tax returns about April, pays the same tax rate anyone else does on income from capital gains from the sale of stocks, bonds, or from dividends and other securities.

While Romney is a millionaire, any American who buys a share of stock and sells it for a profit, or is paid dividends from that stock or other investment, or sells a home would would pay the same rate Romney does.

Investments that pay a return in long term or short term capital gains or dividends, is not just for the wealthy. Tens of millions of workers who invest in 401(k), IRA or Roth savings plans, or through their mutual funds, or stock portfolios, receive the same tax break and that income is taxed at 15 percent.

If you were to buy stock in Verizon, which is about $39 a share, it would pay you a yearly dividend of $2. That's an effective yield on your investment of 5.1 percent -- not bad at a time when most banks are paying less than 1 percent.

Buy some AT&T stock at $30.38 and it would pay you $1.76 per share, an annual yield of 5.8 percent. Where can you get that in today's economy?

But the federal tax on that income would be 15 percent, too.

President Obama, who wants to raise income taxes on big corporations, small businesses who file as individual taxpayers, investors and almost anyone who makes big money, thinks the 15 percent tax is too low.

He's fond of relating billionaire stock investor Warren Buffet's complaint that his private secretary at Berkshire Hathaway pays a higher income tax rate than Buffet does. The reason: virtually all of Buffet's income is from capital gains and other forms of investment, so he pays 15 percent, too.

You never read in the newspapers that his secretary is also an investor and income from her investments is also tax at the 15 percent rate. Earned income is taxed at the regular rates between 10 percent at the bottom and 35 percent at the top.

For the past four years, Obama has been beating up rich people, saying they are not "paying their fair share" in income taxes when, in fact, they pay most of the income taxes that flows into the U.S. Treasury.

In the political world we live in, this kind of rhetoric is known as class warfare, pitting one income class against another. It is also sheer demagoguery.

Obama loves playing this attack game and you can bet he will use it to the fullest extent against Mitt Romney if he wins the Republican presidential nomination.

But the history of capital gains taxes in recent decades reveals that presidents in both parties have cut its tax rate to increase capital investments in the economy and boost growth.

In 1997, President Clinton signed a Republican tax cut bill that slashed the capital gains tax rate from 28 percent to 20 percent. His critics in his party's extreme left wing said it would benefit the wealthy and the lost tax revenue would drive up the deficit.

On the contrary, Clinton's capital gains tax cut fueled an investment boom in the technology sector and the rest of the economy, taxable capital gains nearly doubled over the next three years that led to a budget surplus. Notably, as a result of an explosion in new jobs, unemployment fell below 4 percent

Clinton never mentions his capital gains tax cut in his speeches about his stewardship of the economy, or in his latest book about how to grow the Obama economy and create jobs.

President Bush, too, cut the capital gains tax in his 2003 tax reform, reducing it to 15 percent. Between 2002 and 2005, capital gains reported as income shot up by 154 percent.

"Capital gains tax receipts also far outpaced the [tax] revenues that the government's static models predicted. Between 2003 and 2007, actual tax receipts exceeded expectations as income," writes Stephen Moore, a tax cut crusader on the Wall Street Journal's editorial board.

Despite all the evidence that a low capital gains tax rate boosts economic growth and raises tax revenue, Obama is stubbornly sticking to his failed class warfare economics and wants the capital gains rate raised to 20 percent or higher.

Newt Gingrich is proposing that the tax on dividends and interest be eliminated -- a good idea, but its stands no chance of passing Congress.

Romney is playing it safer. He wants to make the Bush individual tax cuts permanent, reduce the corporate rate to 25 percent, but eliminate the capital gains tax for people making less than $200,000 a year.

Wealthier people in the upper six and seven figure tax brackets are doing okay in this economy, he says, but those in the middle class brackets need to be encouraged to save and invest more.

In one stroke of his agenda pen, Romney robs Obama of the issue he craves most: to attack him as being out of touch with lower income Americans, favoring the rich over the middle class.

It's going to be politically difficult for the president to say Romney favors the rich when he calls for cutting taxes on Americans earning below $200,000, the very middle class income bracket that Obama says he wants to protect from higher taxes.

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