Obama’s Possible Tax Rate Mishap

Anyone with aspirations of making a good living in America please pay up? This is the straight forward statement that Obama has delivered since becoming president. This is his plan to help cut the U.S. major debt problems. As it will go any couple making over $250,000 a year can expect to have substantially increased tax rates to help pay for the lower income families tax cuts. Now my dream of being a Goldman Sachs Trader will cost more than I thought with Federal tax rates rising from 35% to 39.6% for High-Income families. Plus my other goal of starting a Hedge Fund is shot as well as now all Hedge Funds will have to pay Income Tax Rates not Capital Gains Tax Rates on profits. That is a substantial number and the Obama Administration expects $28 billion tax revenue from just the Hedge Funds alone. Don’t be surprised if we see the outsourcing of Hedge Funds with many located outside the U.S. to save the tax breaks. For normal investors, expect to see your Capital Gains Rates rise from 15% to 20%. This I believe is an awful proposition. The increase in Capital Gains hurts no one more than the Middle Class. The High-Income are not affected as they have the capital to allocate resources outside of the U.S. to save on tax breaks. The Middle Class however, does not have this option. Another option they do not have is to stop investing. The Middle Class thrives on the Markets, as it is their opportunity to grow their 401k’s to a level, which will offer retirement and the chance to send their children to college. Obama clearly didn’t educate himself on this situation and should have a sit down with Mitt Romney and be explained why he should cut the rates. Mitt Romney was the one who proposed the plan of Zero Capital Gains Rates for the Middle Class during the election. In this case he classified the Middle Class as families earning less than $200,000 annually. This would apply to 95% of American citizens. The simple fact is nothing would stimulate the economy and markets more than reducing capital gains rates and this is why. Capital Gains play a unique role in fostering economic activity, especially by entrepreneurs in high-technology areas. Many economists even believe that the optimal tax rate is 0 percent. So why not lower them temporally? Temporary capital gains cuts would to nothing than induce investors to sell assets not stimulate new investors. However, a permanent cut would provide incentives for people to sell long-held unproductive assets and reinvest in prospering industries. Many government officials are also scared of the possibility that Markets would fall if we cut the tax rate. This is false, as cutting capital gains rates will cause asset values and the stock market to rise. Lowering capital gains rates increases the price of stock and other assets and the stock markets reflect the collective action of people looking forward. For example, in 1997 the Fed cut the top Capital Gains tax rate from 28% to 20% and markets responded with an 8% increase. Currently companies are also being screwed over as many receive double taxation on both Capital Gains and Income Taxes. For example, say McDonalds earned $100; the Fed takes $35 in corporate taxes leaving $65, which is distributed to investors and then taxed at 20%. That takes another $13 leaving $52 to investors and $48 to the Government. These companies are still exposed to a tax on dividends. Capital Gains taxes are structured so poorly that it is no wonder the economy would rise without them. They are not even adjusted for inflation, which in current times could cause some problems for most investors. So the last complaint that everyone has is that the Government cannot afford large and permanent capital gains taxes. This is untrue as improving economic growth increases federal tax revenue from many sources (Property Taxes, Income Taxes, Corporate Taxes, etc) The government’s goal is to not act like a business trying to maximize tax revenue. The goal should be to enhance economic growth and raise only as much tax revenue as needed.