Obama talks cap-gains rate with CNBC

n an interview in conjunction with his big economic speech in New York, Senator Obama tells CNBC’s Maria Bartiromo he favors increasing the capital-gains tax rate.

Bartiromo reported after her interview: “Right now, as you know, the cap gains tax is at 15 percent. He has yet to give us a specific number. How high he wants that number to go? He has said, and he told me today, that he won't go above 28 percent. So we are talking about the possibility of a doubling in the capital gains tax. He was averaging at about 25 percent.”

Here is her exchange with the senator:

BARTIROMO: "How do you plan to change the tax code when it comes to capital gains? How high will that 15 percent rate go?"

Sen. OBAMA: "Well, you know, I haven't given a firm number. Here's my belief, that we can't go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was the 28 percent. I would--and my guess would be it would be significantly lower than that. I think that we can have a capital gains rate that is higher than 15 percent. If it--and if it, you know--when I talk to people like Warren Buffet or others and I ask them, you know, what's--how much of a difference is it going to be if it's 20 or 25 percent, they say, look, if it's within that range then it's not going to distort, I think, economic decision making. On the other hand, what it will also do is first of all help out the federal treasury, which is running a credit card up with the bank of China and other countries. What it will also do, I think, is allow us to make investments in basic scientific research, in infrastructure, in broadband lines, in green energy and will allow us to give us--give some relief to middle class and working class families who have been driving this economy as consumers but have been doing it through credit cards and home equity loans. They're not going to be able to do that. And if we want the economy to continue to go strong, then we've got to make sure that they're getting a little relief as well."

Obama's 'Patriot' Act

Wall Street Journal
February 27, 2008; Page A16

No, we're not talking about Barack Obama's opposition to the post-9/11 antiterror law. We're referring to the Senator's support for something called the Patriot Employer Act, which deserves more attention as an indicator of his economic agenda.

Along with Democratic co-sponsors Sherrod Brown and Dick Durbin, Mr. Obama introduced the bill in the Senate in August 2007. Recently in Janesville, Wis., he repeated his intention to make it a priority as President: "We will end the tax breaks for companies who ship our jobs overseas, and we will give those breaks to companies who create good jobs with decent wages right here in America."
[Barack Obama]

Mr. Obama's proposal would designate certain companies as "patriot employers" and favor them over other, presumably not so patriotic, businesses.

The legislation takes four pages to define "patriotic" companies as those that: "pay at least 60 percent of each employee's health care premiums"; have a position of "neutrality in employee [union] organizing drives"; "maintain or increase the number of full-time workers in the United States relative to the number of full-time workers outside of the United States"; pay a salary to each employee "not less than an amount equal to the federal poverty level"; and provide a pension plan.

In other words, a patriotic employer is one which fulfills the fondest Big Labor agenda, regardless of the competitive implications. The proposal ignores the marketplace reality that businesses hire a work force they can afford to pay and still make money. Coercing companies into raising wages and benefits above market rates may only lead to fewer workers getting hired in the first place.

Under Mr. Obama's plan, "patriot employers" qualify for a 1% tax credit on their profits. To finance this tax break, American companies with subsidiaries abroad would have to pay the U.S. corporate tax on profits earned abroad, rather than the corporate tax of the host country where they are earned. Since the U.S. corporate tax rate is 35%, while most of the world has a lower rate, this amounts to a big tax increase on earnings owned abroad.

Put another way, U.S. companies would suddenly have to pay a higher tax rate than their Chinese, Japanese and European competitors. According to research by Peter Merrill, an international tax expert at PriceWaterhouseCoopers, this change would "raise the cost of capital of U.S. multinationals and cause them to lose market share to foreign rivals." Apparently Mr. Obama believes that by making U.S. companies less profitable and less competitive world-wide, they will somehow be able to create more jobs in America.

He has it backwards: The offshore activities of U.S. companies tend to increase rather than reduce domestic business. A 2005 National Bureau of Economic Research study by economists from Harvard and the University of Michigan found that more foreign investment by U.S. companies leads to greater domestic investment, and that U.S. firms' hiring of more offshore workers is positively, not negatively, associated with the number of American workers they hire. That's in part because often what is produced overseas by subsidiaries are component parts to final, higher-value-added products manufactured here.

Mr. Obama is also proposing to raise tax rates on affluent individuals, as well as on capital gains and dividends. This would also lead to more capital and jobs leaving the U.S. The after-tax return on U.S. investment would fall appreciably if these tax hikes were adopted, and no amount of tax-credit subsidy will keep capital from fleeing to lower tax jurisdictions.

If the U.S. didn't impose the second highest corporate income tax rate in the world, companies would have less incentive to move jobs overseas. Rather than giving politically correct companies a 1% tax credit, it makes more sense to reduce the U.S. corporate tax rate for everyone -- by at least 10 percentage points to the global average.

Economists have long understood that companies don't really pay taxes; they merely collect them. A study by the American Enterprise Institute has shown that U.S. workers bear the cost of the corporate income tax in lower wages and salaries. To borrow Mr. Obama's language, what's really unpatriotic is the 35% U.S. corporate tax rate.

Inflation and the Tax Man

By RICHARD W. RAHN
January 17, 2008; WSJ Page A17

Rudy Giuliani's tax-reform proposal includes indexing capital-gains taxes for inflation -- that is, putting the original price of the asset in today's dollars. All of the Republican candidates have called for low or lower taxes on capital gains, while the Democrats favor higher capital-gains taxes. But inflation-indexing of capital gains should be part of every candidate's "economic stimulus" package, regardless of party affiliation.

Accounting for inflation in this way has the advantages of producing more short-term revenue to the Treasury as long-term gains are "unlocked." Furthermore, lowering the cost of capital would stimulate investment and the stock markets, and would increase the fairness of the tax system by not taxing phantom gains for people at all income levels. It would also square capital-gains taxation with the U.S. Constitution.

Assume you purchased a common stock in a company in 1984 for $100 a share and sold it in 2007 for $200 a share. Have you received any "income" from the sale of the shares of stock? The IRS would say "yes," but this is clearly wrong. The IRS will claim that you had a $100 per share capital gain on the stock in the above example, yet actually the increase was solely a result of inflation. Because you cannot buy more goods and services with $200 now than you could have with $100 in 1984, you have had no "income" or wealth accretion.

Over the years numerous economists, lawyers and others have tried to fix this problem and have gotten nowhere with Congress. But now, due to increased concerns about inflation, economic growth and judicial salaries, the time may be right to move forward.

Chief Justice John Roberts has just renewed his call for an increase in pay for federal judges. He, his predecessor William Rehnquist and other judges have complained about the "steady erosion" of judicial salaries over the past 20 years. According to Article III, Section I of the U.S. Constitution, compensation of federal judges "shall not be diminished during their Continuance in Office."

As inflation has outstripped the increase in judicial salaries, the judges have clearly had "diminished compensation" in real terms. Chief Justice Roberts currently makes $212,000 per year, yet all but five of his predecessors in the past 200 years made more in inflation-adjusted dollars (Warren Burger's 1969-1986 income averaged about $250,000 per year in 2006 dollars).

The debate centers on the definition of income. The 16th Amendment to the Constitution states, "The Congress shall have the power to lay and collect taxes on incomes," and the Fifth Amendment clearly states, "No person shall . . . be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation."

If the portion of a capital gain due solely to inflation is not income, then taxation without inflation-indexing is an unconstitutional taking of property. Income is commonly defined as, "the amount of money or its equivalent received during a period of time in exchange for labor or services from the sale of goods or property, or as profit from financial investments."

To be money or its equivalent, the payment must have the power to command goods or services produced in the economy. Thus, if the money received from the sale of an asset cannot command more goods and services than the original capital invested, there clearly has been no income.

Too few judges and members of Congress have a basic understanding of economics. As a result, they do not readily see how small but steady losses in value over long periods (except when it comes to their own salaries) is damaging. Inflation of 2%, 3% or 4% per year may seem trivial, but over time it causes great distortions -- the U.S. dollar is now worth less than 1/20th of what it was worth in 1913 when the Fed was established. If the 12% inflation the U.S. experienced in 1979 had continued, the price level would have doubled every six years.

Congress, in order to prevent unlegislated tax-rate increases, has indexed the tax brackets and some other parts of the income-tax code for inflation, which recognizes that a dollar of income in 1998 is not the same as one in 2008. Yet they have failed to do this for capital gains or the AMT, which is now creating great heartache for them as well as for taxpayers. For the code to be logically consistent and to avoid an unconstitutional taking of property -- and for the word "income" to have the same meaning throughout the code -- any capital gain necessarily needs to be indexed for inflation.

The reasons capital gains have not been indexed for inflation (in addition to some members of Congress and judges who do not understand the proper definition of income) are that some argue it would be too complex, and that, since capital gains are taxed at a lower rate than regular income, the problem has already been addressed. Some claim it would result in a big revenue loss. But in the age of advanced tax software, indexing of capital gains is no more complex than many other provisions of the tax code. (The whole code needs to be simplified, but that is another issue.)

Taxing capital gains at a lower rate is done for a number of good economic reasons, and only offsets inflation for assets that have appreciated rapidly in a short time period. Adjusting capital gains for inflation would clearly increase revenues in the short run because of the "unlocking" effect, and probably over the long run because of the higher levels of investment it would stimulate. Over the past 30 years, the Joint Tax Committee, using largely static models, has consistently erred grossly -- at times even getting the direction of the plus or minus sign wrong -- in forecasting capital-gains tax revenues as a result of tax-rate changes.

The Bush administration ought to make inflation indexing part of its "stimulus package." If properly explained, considerable bipartisan congressional and judicial support should be obtained. A number of legal scholars have argued that the executive branch could unilaterally make the change by requiring the IRS to correctly define the words "cost" and "income," given that it was the IRS that originally incorrectly defined them.

It is not likely that many judges or members of Congress would find it in their personal, political, or the national interest to argue that phantom gains are "income." After all, most Americans do understand the meaning of income, even if some in Washington do not.

Mr. Rahn is the chairman of the Institute for Global Economic Growth and an adjunct scholar at the Cato Institute.

URL for this article: http://online.wsj.com/article/SB120053175732296095.html

Another Bush Tax Cut

Wall Street Journal December 20, 2007; Page A16

Nancy Pelosi and her fellow House Democrats surrendered to reality yesterday, grudgingly handing President Bush and taxpayers another victory. They finally passed a one-year "patch" that will prevent the Alternative Minimum Tax from hitting some 22 million middle-class Americans when they file their 2007 tax returns next year.

Congress passed the AMT in 1969 to hit a handful of millionaires who were said to be exploiting too many loopholes also passed by Congress. But because it isn't indexed for inflation, and because Democrats raised AMT rates in 1993 to 26% and 28% from a single rate of 24%, the AMT has turned into a blob that sucks in ever more taxpayers earning between $75,000 and $200,000 a year.

Now back in the majority, Democrats have found themselves hoist on their own 2006 campaign pledge for "pay as you go budgeting," which meant offsetting any AMT tax "cut" with $50 billion in other tax increases or spending cuts. Mr. Bush and Republicans sensibly argued that, because it was never intended to hit so many people, the AMT shouldn't be used as an excuse to raise taxes on other Americans. And with an election year coming, Senate Democrats didn't want to raise taxes on their rich hedge-fund donors. So House Democrats had little choice but to abandon "paygo" as well and pass AMT relief without any offsetting tax increases.

This is good news for the economy, which is struggling enough without a new tax on private equity or other risk takers. Even better for the longer term, this Democratic decision to abandon paygo may foretell less damaging economic policy in 2009. The main goal of paygo is to make cutting taxes all but impossible, and in particular to prevent any extension of the lower Bush tax rates that expire after 2010. This year's AMT fight has exposed paygo for the political fraud it is, and sets a precedent for abandoning it in 2009 in order to avoid walloping the economy with an even bigger, and more damaging, tax increase.

Democrats will of course have to come up with another one-year "patch" in 2008 before the election, and already they're promising that this time they really will stick to paygo. Right. Our own advice is that Democrats could avoid these annual acts of political masochism if they'd merely repeal their own 1993 AMT tax-rate increases, which would stop the tax from snaring so many voters in their own "blue" states. Meantime, who would have guessed that a Democratic Congress would continue Mr. Bush's streak of cutting taxes in some form in every year of his Presidency. Congratulations, Madam Speaker.

Dems Call for Taxes on Wealthy at Debate

What else is new? Tax the wealthy-tax big corporations. Tax relief for the middle class and the poor. . The rhetoric to the uninitiated is high-minded and seems to make sense. But change it a bit and you get the the reality.

Tax the successful, tax the winners, reward the mediocrity...reward the losers. If you think this is the future success story for America, than by all means vote for your favorite Democrat. I pray Americans are smarter than that, but when they get a chance to vote for a 'free lunch'..all bets are off.

New Iowa Pumpkin Tax Puts Damper on Growers' Halloween Spirit

Renee Mulvey

The Iowa Department of Revenue is taxing jack-o'-lanterns this Halloween.

The new department policy was implemented after officials decided that pumpkins are used primarily for Halloween decorations, not food, and should be taxed, said Renee Mulvey, the department's spokeswoman

"We made the change because we wanted the sales tax law to match what we thought the predominant use was," Mulvey said. "We thought the predominant use was for decorations or jack-o'-lanterns."

Methinks, Renee must be a Democrat...

Read it all.....

Inconvenient Tax Truths

Charlie Rangel and other liberal leaders want to raise tax rates even if it means lower tax revenues.

BY PETE DU PONT
Tuesday, October 30, 2007 12:01 a.m.

Nobel Peace laureate Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support.

Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion, the largest four-year revenue increase in U.S. history. In fiscal 2007, which ended last month, the government took in 6.7% more tax revenues than in 2006.

These increases in tax revenue have substantially reduced the federal budget deficits. In 2004 the deficit was $413 billion, or 3.5% of gross domestic product. It narrowed to $318 billion in 2005, $248 billion in 2006 and $163 billion in 2007. That last figure is just 1.2% of GDP, which is half of the average of the past 50 years.

Lower tax rates have be so successful in spurring growth that the percentage of federal income taxes paid by the very wealthy has increased. According to the Treasury Department, the top 1% of income tax filers paid just 19% of income taxes in 1980 (when the top tax rate was 70%), and 36% in 2003, the year the Bush tax cuts took effect (when the top rate became 35%). The top 5% of income taxpayers went from 37% of taxes paid to 56%, and the top 10% from 49% to 68% of taxes paid. And the amount of taxes paid by those earning more than $1 million a year rose to $236 billion in 2005 from $132 billion in 2003, a 78% increase.

Finally, another inconvenient truth is that there have been 49 consecutive months of job growth as a result of the economic expansion induced by President Bush's 2003 tax rate reductions.

One would think that this positive economic performance would inspire Congress to continue the successful policies that caused it. But the liberal establishment takes a negative view of tax rate reductions and embraces the opposite approach: ensure expiration of the Bush tax cuts in 2011 and in the meantime enact substantial tax increases.

Rep. Charles Rangel of New York, chairman of the tax-writing House Ways and Means Committee, last week introduced an estimated $3.5 trillion tax increase that would raise the capital gains tax rate from to 19.6% from 15% and places a surtax of as much as 4.6% on people making more than $150,000 a year. Mr. Rangel applies it not to current taxable income but to adjusted gross income, thus phasing down itemized deductions such as charitable contributions, home mortgage deductions, and state and local tax deductions. Together with the end of the Bush tax cuts, Mr. Rangel's plan would increase the top income tax rate to 44% from 35% for individuals, small-business owners and farmers, who make up about three-fourths of taxpayers in the highest bracket.

While raising taxes on individuals, the Rangel bill would reduce corporate tax rates to 30.5% from 35% and eliminate the alternative minimum tax. That would be "paid for" by increasing taxes on hedge funds and buyout firms by about $48 billion.

Federal tax revenues have been rising between 6.7% and 14.5% in each of the past three years, but the proposed tax increases, by slowing rather than stimulating the economy, would ensure that these percentages decline. Hillary Clinton defines the liberal tax policy as "we are going to take things away from you on behalf of the common good," but in the unlikely event that the tax bill passes Congress next year, President Bush's veto pen will surely take away from the liberal leadership things that will do harm to the common good.

On the other hand, the 2008 elections could lead to a very different outcome, for the Rangel bill shows in which direction tax policy will proceed if there is a Democratic president and Congress in 2009.

A much more interesting approach was introduced in the House three weeks ago by Rep. Paul Ryan, a Wisconsin Republican: elimination of the Alternative Minimum Tax, extension of the 15% capital gains and dividend rates that expire in 2010, and giving taxpayers a choice between filing under the current tax system or a new option with just two income tax brackets, 10% for joint filers with incomes less than $100,000 and 25% for those with higher incomes. It includes a $25,000 standard deduction plus a $3,500-a-person exemption, which comes to $39,000 for a family of four. The new option would be a flat-tax choice, with no other exemptions or loopholes, and the AMT would be gone.

Every taxpayer would be able to make a choice between the current tax system with the AMT burden, tax rates from 10% to 35%, and many complex deduction options, or the Taxpayer Choice Act. Mr. Ryan estimates that the federal government's revenues--excluding AMT revenues, the elimination of which would cost the government only about 2.4% of revenues over 10 years--would be about the same as under the current system, and the top 5% and 1% of taxpayers would pay slightly higher taxes than they do today.

Such a system would stimulate the economy, increase economic growth and job opportunities, and simplify a very complex and frustrating current tax system. But for the liberal establishment a flat tax with lower rates would be a very inconvenient truth. Much better in their view are the substantial Rangel tax increases.
Mr. du Pont, a former governor of Delaware, is chairman of the Dallas-based National Center for Policy Analysis. His column appears once a month.

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