Tax Reform

Summary

Taxes should be designed to raise revenue from the government, not to pursue social engineering and other policy goals. Since lower rates can increase revenue, tax reform that lowers rates and closes loopholes is the wisest approach.

When he was running for office in 2008, Barack Obama, in a primary debate with Hillary Clinton, received the following question from Charlie Gibson of ABC News:

MR. GIBSON: You [Barack Obama] have… said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton, which was 28 percent.”

It’s now 15 percent. That’s almost a doubling if you went to 28 percent. But actually Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20 percent.

SENATOR OBAMA: Right.

MR. GIBSON: And George Bush has taken it down to 15 percent.

SENATOR OBAMA: Right.

MR. GIBSON: And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

I didn’t expect this level of economic savvy from Charlie Gibson, but he was right on the money. Generally speaking, a lower tax rate on a higher volume of revenue brings in more money than a higher tax rate on a lower volume of revenue. If the capital gains tax were raised to 100%, it would be just like raising airplane ticket prices to a million bucks a head. The high price would bring in no money, because no one would be stupid enough to buy a ticket – or take a capital gain – when the system was so punitive.

So here was Obama’s answer:

SENATOR OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness. We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.

It’s stunning to me that Obama did not dispute Gibson’s point. But he doesn’t care. The overriding principle is fairness, so he was willing to raise the capital gains tax  – even if it cost the government money to do it!

I simply don’t understand this. if I’m a secretary, my paycheck isn’t going to get any bigger if my boss has to pay more in capital gains tax – quite the opposite, in fact, since that boss now has fewer resources to reinvest into the business. Yet Obama was interested in raising taxes not to get more money for the government but solely to punish the rich.

He continued, trying to temper his remarks but still digging himself deeper into his hole:

SENATOR OBAMA: And what I want is not oppressive taxation. I want businesses to thrive and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don’t have it and that we’re able to invest in our infrastructure and invest in our schools.

Okay, fine. But if you want money for “investments,” don’t raise the taxes and squelch off the revenue stream!

Incredibly, Gibson manages to call him on this.

MR. GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

To which Barack lamely responds:

SENATOR OBAMA: Well, that might happen or it might not.

And the sun might rise tomorrow or it might not. And United Airlines might have lots of planes full of people paying a million dollars a ticket. These are solid principles – you cannot repeal the law of supply and demand, no matter how fair you want to be.

Research shows that the amount of revenue as a percentage of GDP collected from taxes remains remarkable stable, regardless of where the rates are. So if lower rates can bring in just as much revenue as higher rates, and perhaps even more, shouldn’t lower rates be the default position of the federal government?

I’m happy to support any of President Trump’s tax proposals that recognize these fundamental economic principles.