Obama stumbles on capital-gains tax again

Earlier today, I reviewed what I thought were the worst stumbles Barack Obama made in his Fox News interview with Chris Wallace this morning. However, a few e-mailers point out a more subtle mistake on the capital-gains tax, the same subject on which he failed miserably in the April 16th debate. A YouTube has begun making the rounds showing Obama attempting to walk back his previous position, but not really comprehending why he has to do so:

OBAMA: … If you look at my approach to taxation, what have I said? I’ve said I would cut taxes for people making $75,000 a year or less. I’d cut taxes for seniors who are making $50,000 a year or less. It is true that I would roll back the Bush tax cuts on the wealthiest Americans, back to the level they were under Bill Clinton, when I don’t remember rich people feeling oppressed.

In terms of capital gains, I’ve suggested we might go back up to 20 because –

WALLACE: You have suggested 28.

OBAMA: Well, but what I’ve said is, I certainly would not raise it higher than it was under Ronald Reagan. But the fact is, is that I’m mindful that we’ve got to keep our capital gains tax to a point where we can actually get more revenue.

But that’s not something that’s going to affect the average person with a 401(k). When people start talking about how, well, there are millions of Americans who own stock, most of them own stock in 401(k)s that — where their taxes are deferred and they pay ordinary income taxes when they finally cash out.

If Obama really wanted to get the capital gains tax to produce more revenue, he would decrease it, not increase it. He tries to laugh this off by saying that rich people didn’t mind the 28% rate under Bill Clinton, but in fact they did. When Clinton finally lowered it from 28%, under pressure from the Republican Congress in 1997, investment capital tripled. The resultant economic expansion from 1998-2000 outperformed the three-year period after the 1993 tax increase by a full percentage point in average GDP. This lesson instructed the Bush administration in how to generate economic growth, leading to the further reduction in CGT rate in 2001, and the five-plus years of expansion that resulted from it after absorbing the economic damage of 9/11.

Furthermore, in this interview as in his debate answer, Obama never gives a really good reason to increase the CGT rate –except his nebulous issue of “fairness”. Once again, Obama doesn’t explain how an increased rate will generate increased revenues. It won’t; instead of selling off moderately-performing assets and taking the tax hit to invest in higher-risk, higher-potential investments, people will instead hold assets until the tax situation improves. That not only means less revenue as capital gains go unrealized, it means a lot less capital for new economic growth, which will help stall the economy.

Obama still displays no real comprehension of the dynamics of investment and tax policy, a shortcoming with real consequences in a President. He favors jacking up tax rates to redistribute capital from those who earn it to those who do not, and like others before him, he will find those gains elusive. If Democrats are to be believed that the economy has headed seriously south, what’s needed is massive incentive for investors, not another disincentive for capital to go into hiding.

That isn’t a gaffe in the normal sense, but it is a revelation about the kind of economic illiteracy we will see in an Obama administration.