Obama's Capital Gains Ignorance

As the WSJ (subscription may be required) points out, part of the reason Barack may be so ignorant of capital gains taxes is due to his apparent lack of personal stock market investing, at least according to his tax forms.

One of the common fallacies of taxes, which have been very poorly communicated by Republicans, is that higher tax rates typically mean lower future revenues and lower rates mean higher future revenues. This has been evident since the Kennedy administration through the Reagan, Clinton and Bush administrations.

Critics howled this would reduce tax revenues, and they howled when Republicans cut the rate to 15% in 2003. What followed in both cases was an enormous "unlocking" effect, as investors sold more stock and assets to take advantage of the lower rate. Capital gains realizations soared to an estimated $729 billion in 2006 from $269 billion in 2002. This goosed Treasury receipts from capital gains, to an estimated $110 billion in 2006 from $49 billion in 2002.

Mr. Obama doesn't have to guess what sort of "distortion" would come from significantly raising the cap-gains rate. In 1986, the tax rate jumped to 28% from 20%, a 40% increase. Tax revenues spiked briefly in anticipation of the hike (as investors moved to cash in at the lower rate), then dropped precipitously. Four years later, in 1990, the federal government was still taking in 13% less revenue at the 28% rate than it did in 1985 at the 20% rate.

Why this tax message never gets out to the public is beyond me, but it's been true for the better part of five decades and counting. It's time that historical results start counting for something.