When Barack Obama was running for President back in 2008, he was asked in a debate about the capital gains tax. He wanted to raise. When it was pointed out that raising the tax does not raise tax revenue, he did not disagree. He said it was a matter of “fairness”.
That didn’t make sense. Even a liberal doesn’t think the tax code is there to spread “fairness”. So why would the President be for raising the tax rate and not tax revenue. You have to think it through to answer the question.
Entrepreneurs take a risk when they start a company. Investors take risks when they invest in companies. Unless you a fat-cat bank with ties to the government, the system is set up so that you own your loses and share your gains. If you lose…well that’s too bad. If you gain, the government is there to take their share in the form of capital gains or income tax. Raising the rate has the effect of reducing investment in business.
So why would the President who is focused like a laser on jobs push such a policy?
You have to consider what happens to the money that would have been invested in business. It won’t sit idle. Investors look for other investment vehicles. A lot of that money that would have been invested in business will now end up going to tax-free bonds. Those tax-free bonds are issued by local and state governments.
So who wins: Big government, public employee unions and business that work with the government (and usually subject to prevailing wage laws…and therefore unionized).
This is exactly what Barack Obama wants. So raising the capital gains tax is not about fairness and it’s not about tax revenues. It’s all about big government and union jobs.
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I agree that what most people fail to take it the next step which is it to consider what that money would have been used for. I think of investments are like other tradable commodites in that they are governed by the market forces of supply and demand. If the capital gains rates were to rise, the value of tax exempt state and county bond would increase. There would be increased demand to purchase tax exempt state and country bonds.
What I fail to see, is that how a change in tax policy would create a the need for state and local governments to issue bonds. Simply changing tax policy doesn’t give local and state governments more projects that require funding. So demand for investment opportunities in county bonds increase where the supply (available state & local bonds) stays constant would drive interest rates on those bonds lower. A new equilibrium would be reached a significant portion of investors would still invest in taxed enterprises. State and county governments would benefit from the lower interest rates as they would be able to fund more projects with the same amount of money.
You are just part of the problem when you expouse
“INSERT POLITICIAN” has a “secret” agenda and I hold the keys to unraveling the “evil” motives behind what “POLITICIAN” is telling you. I can prove it with generalities, disregard for a complete set of the facts, and a complete lack of objectivity of fairness to support my narrow argument!
If the demand for tax-free bonds go up (in other words, more buyers), then the interest rate should go down. Lower interest rates means projects become more affordable. It may not even be that more government projects are created (God knows there is enough red tape to stop that), but maybe more money is spent on each project. I don’t agree that a lower cost of borrowing would not effect the amount of borrowing.