Capital Gains Elimination?

During last night’s acceptance speech from Barack Obama, I heard many generalities with few specifics. I may have heard a different speech than Keith Olbermann. Obama did give one specific proposal regarding taxes. He promised to eliminate capital gains taxes for the small businesses and the startups that will create the high-wage, high-tech jobs of tomorrow. This was an odd statement for a few reasons.

Corporations don’t have a preferential capital gains rate. Corporations are taxed on capital gains at regular tax rates to a maximum of 35%. So if he is eliminating the capital gains rate on small businesses, is he essentially reducing the tax rate to zero? What defines ‘small businesses’? The interesting thing is startups and small businesses rarely have capital gain transactions, regardless of the tax implications. Capital gains only arise from selling capital assets. Small businesses generally earn income from selling services or inventory. Both of those occurrences generate ordinary income and would not benefit at all from Obama’s buzzword banter.

Back in March, Obama said capital gains rates needed to be raised. He said he would not go higher than Bill Clinton’s 28% rate, but mentioned 20% and 25%. Does this mean that Obama believes individual savers should pay more in capital gains while businesses should pay nothing?

If reducing or eliminating capital gains for businesses would create jobs, wouldn’t reducing or eliminating capital gains for individuals create economic growth. It certainly did in the 90’s when the Republicans reduced the rates from 28% to 20% through the Taxpayer Relief Act of 1997. That directly led to 3 straight years of superb growth.

My cynical side says that the Democrats know the evidence is overwhelming that low capital gains rates lead to economic growth which actually leads to higher tax revenues. This, however, is an issue that they cannot go toe to toe with Republicans and win. So, they decide to use the ‘Cut Capital Gains’ terminology. That way when properly challenged on their proposal to raise capital gains taxes, they can reply ‘No. We’re going to cut capital gains taxes’, even though it is meaningless.

Now, I’m all for low capital gains. But I’m more in favor of politicians not using smoke and mirrors to hide tax increases like Obama advocated in March with a ‘tax cut’ that doesn’t exist because nobody will qualify for it.