Obama and Taxes

Sen. Barack Obama (D-Ill.) seriously underestimates the impact of taxes on the economy and the federal budget. If elected president, and if he were to raise the capital gains tax as promised, the response of investors would be to sell prior to the anticipated capital gains rate increase or not sell at all.

When selling prior, you get the lower capital gains rate, and afterwards a higher capital gains rate. For example, if you have realized capital gains of $1 million, selling now will cost you $150,000 in federal taxes at a 15 percent tax rate. If you sell after Obama wins the White House, you will have a 25 percent tax rate, or $250,000 tax bite.

You may decide not to sell, and there are a number of strategies you can explore. You may borrow against your capital gains and wait for death to come (when there is a step up in tax basis and as a result no capital gains tax). Other tax shifting strategies include executives who can pay themselves this year and not pay one penny in Obama’s first year in office. International companies can arrange to have diverted to lower tax jurisdictions. Otherwise productive executives and professionals, especially older ones, could choose what many of my colleagues are considering: stop working if the tax rates reaches an incredibly high level.

The impact of high capital gains tax rates on investment decisions would significantly discourage investment. The pre-tax rate of return that one has to be assured of on an investment must be much higher in a high tax environment than a low tax economy. Entrepreneurs who are the lifeblood of the American economy will be less likely to make investments in high-risk marginal projects. That would include investments in high-risk low-income communities that provide jobs for working people.

What does all this mean? By increasing the tax rate you will not necessarily get more taxes, and there’s a strong possibility that you get less, for people will alter their behavior so that they have less taxable income. The proposed increase in capital gains and ordinary income tax rates will have a devastating impact on the GNP if candidate Obama has his misguided way as president.

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