The Next New Tax May Just Be The ‘Spite Tax’

Back in 2008, candidate Obama was debating Hillary Clinton on the subject of increasing the capital gains tax rate. Barack Obama was for increasing the tax rate. Hillary wasn’t so sure. The moderator succinctly explained that increases in the capital gains rate (due to its inverse relationship with economic activity) actually lead to decreases in government tax revenue. Despite this historical fact, then candidate, now President Obama said he would still work towards increasing the tax rate for “purposes of fairness.”

(Debate clip below)

After viewing that video, I ask you this: By “fairness,” does he really just mean spite? I ask that seriously, not in partisanship. Nobody benefits from such a tax increase. The taxpayers pay a higher tax rate and are scared away from investing, while the government has less money to spend on social programs. So why would anybody support such a policy? To be fair, he still hasn’t increased this particular tax rate. Since marquee tax hikes are generally unpopular, it could be move more appropriate in a second term though. Nonetheless, it’s more about the broad idea than the specific policy. You’ll see this theme or fairness at the DNC contrast sharply against the theme of self-made success that was oft-discussed at the RNC.

Does this underlying attitude or taxing for “fairness” represent your views?

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11 thoughts on “The Next New Tax May Just Be The ‘Spite Tax’

  1. The clip you’ve identified is the Rosetta Stone to unlocking this administration’s nihilism and philosophical bankruptcy. It’s the moral equivalent of cutting loose empty lifeboats from the listing Titanic. Better, so their twisted morality goes, to force everyone to perish together in the name of equality and fairness, than to allow some to live to see another day.

  2. Ryan,
    As you are someone who regularly tries to keep me honest in my posts (to which I appreciate your input), I’m disappointed at this post and how you presented it. First, you say “I ask that seriously, not in partisanship”, yet you post a cut up video with partisan comments plastered right in it to help the viewer see “just how wrong the debaters are”. Clinton said she would have to review the revenues to make a determination and the comment that follows suggest that she has already made up her mind. You could’ve posted just the uncut interview without the Republican biased comments. Secondly, the video cuts out important parts of Obama’s response. Thirdly, you put 100% trust in Charles Gibson that his assertion is correct when in fact it is quite distorted. It is true that immediately after a tax cut, the revenues go up and that immediately after a tax increase the revenues go down, but that is only because people can control when to claim the gains, at least for a short period of time. So naturally people will claim the gains when the taxes are the lowest, causing a spike in revenue during the lower rate. In the long run, Charles’ comments do not hold up. Please review the following article and let me know if you still think it is wrong to raise capital gains taxes.

    If you watched the video in the article, Obama explains that 50 people made a combined $29 Billion from capital gains and therefore only had to pay 15% on that while the rest of Americans are paying a much higher percentage on a much, much, much smaller amount. If the capital gains taxes were higher, then the government could lower everyone else’s tax rates. Would you consider that to be out of spite? Part of the problem is that we all would hate to tax capital gains for people using that money for retirement. Without complete knowledge of all the details, it seems to me there should be a small rate up to some number (say $1 Million) and then a much higher rate for each dollar earned after that. But overall I don’t think a higher tax rate on capital gains hurts the economy and I think it could be a good way to pay for tax cuts for everyone else and, for now, help us pay down our debt. And that is not out of spite for anyone.

  3. Lance,

    As always thank you for the comment. I searched some more (it really wasn’t all that easy to find) a video clip that had less commentary (although the title isn’t as objective).

    Now this one has his full response and I think it’s much more damning because of it. He attacks the super wealthy hedge fund manager, but I’m not sure why we are all supposed to loathe this folks. That’s an interesting article you shared, and at least one point it is dead right.

    I can tell you this, if Capital Gains rates look like their going to go up, I’m going to be much less aggressive in my retirement planning, as would any intelligent investor. Many will consider selling off some of what they have now to avoid the upcoming higher tax rates. Now that’s bad for the economy! You don’t want investors exiting the market.

    “Fairness” is poppycock. A smart government taxes inelastic goods such as alcohol and tobacco as much as reasonable (AND NEEDED) and taxes elastic goods such as investments and clothing much less. The obvious exception would be food.

    In his response, Barack Obama attacks Bush for the four million in debt he accrued as President (over eight years…a figure he has eclipsed in under four) and said, “I believe in the principle in pay as you go.” He said that practice would end under his watch. Four years later, that sounds like a blatantly broken promise.

    What say you?

    On a totally different subject, how great did Clemson look against Auburn. We’ll head into the biggest game in the ACC this year ranked about 10. It should be a 5 vs. 10 matchup in Tallahassee.

    I’m not sure if we can beat FSU, I picked us to lose that game. Wake barely beat Liberty, they won by 3. I was a little worries about playing them on the road on a Thursday, but not so much anymore. Now the four challenging remaining on our schedule are FSU, GT, VT, and USC.

    I don’t think it would be unreason (not likely, but possible) for a 1980, 1981 championship results over the next two years. I’m looking forward to playing UGA next season.

  4. The Republicans are doing a good publicity campaign to keep calling it an “attack on success” or an “attack on the rich”. If Bush came to you back in 2005 or so and said, we need you to pay a few more percentage points higher in your taxes because we have to pay for this war, would you say he was attacking you? Liberals (at least most) do not hate the rich or that they are successful, but they do hate when they pay 15% while they pay 25% – 35%. It sounds to me that you prefer a regressive tax system where the more you make, the smaller the percentage in taxes you should pay. You say “I’m not sure why we are all supposed to loathe this folks” which falls right into that campaign. No one is asking you to loathe them. Asking them to pay more to help pay down our debt (which we would have needed with or without Obamacare) since it won’t hurt them as much as everyone else is not out of hate or spite. I don’t think Obama hates or spites Buffett or Gates.

    Now, if capital gains taxes were doubled to 30%, where exactly are you going to move your investments? There would still be no better place to put your money than the US Stock Market (Stocks, Mutual Funds, 401K’s). The capital gains tax doesn’t affect your 401K, so there is no reason to not put your money there if the CG tax goes up. Our economy is still better than just about any other country and the risk/return ratio is so good that other countries invest in us. I can’t think of anywhere else where you would be better off with your money. Let me know where you think you would put it.

    Also, it is correct that investors would sell off right before the taxes go up. But guess what? 1. They are selling to someone else who is investing and 2. They are going to take that money and put it right back into another investment. Why wouldn’t they? Where else are they going to put it? They are not going to exit the market as you suggest.

    And as for the affect it has on the economy, Bush dropped the CG tax quite a bit and you can’t say that it helped the economy. And how was our economy doing when tax rates were over 70%?

    “that sounds like a blatantly broken promise”. I’m not happy about adding to our debt and I think Obama is trying to change that, but he can’t get his policies through Congress. Let’s not go down this path here because I could provide a list of broken promises, distortions, evasions and lies from Romney and Paul. And I’m sure you have a nice list of the same for Obama.

  5. To three of your key points:

    1) I would chose to invest in more conservative investment vehicles and potentially precious metals. Here is one I am looking into:

    2) Of course they’re selling to other investors! That’s how it works, but when a lot of people decide to sell on an investment vehicle, the price of that investment drops until quantity demanded rises to meet supply, thus a quick sell off would hurt and already struggling economy.

    3) I’m not going to get on a soap box and list Obama lies, but he had two years of Democrat-controlled congress and he got whatever he wanted, including Obamacare. What he did not do in that time was pass a budget. He will be the first President ever to serve a full term and never sign a budget.

  6. 1) You’re saying that if GC taxes are increased, you’ll move your money from a diversified stock market into an un-diversified precious metals market where you would still pay not only a GC tax, but a much higher GC tax on your returns? And if everyone will go to precious metals, they’ll just end up inflating the cost of them and there will be a bubble crash coming soon. And aren’t annuities just another investment in the stock market, one that doesn’t give you the same diversified choices you can get elsewhere, meaning that you can’t earn the same types of returns? And then when you do take your money out you are still paying your income tax rate. It doesn’t seem like a good plan, but good luck with it. I don’t think people like Warren Buffett are going to do that, but I don’t know for sure.

    2) I don’t follow your logic on this one. If people decide to sell off to get the lower tax rate (and a lot of people would just keep their investment) they are still going to buy new investments. Basically, person X will by person Y’s and vice versa.

    3) Let’s talk about where the economy was headed after Republicans controlled everything for 6 years and where the economy was headed after Dems controlled everything for 2 years. Would you rather be on the path we were on in 2007 or the path we were on in 2011? I get tired of hearing about Dems controlling everything for 2 years but no one considering the what happened on the same issues for the Reps 6 years (immigration, gay rights, abortion, economy, health care, “voter fraud” – what did Reps do about any of these? why didn’t they ban abortion in those 6 years? Why do they only fight for fetus rights when Dems are in control?). Again, this debate could go on-and-on and I don’t want to go down this path on this blog post, so I’m trying to stick to your main topic of this blog post and point out that I think it is wrong to call higher GC taxes “spite”. Asking for more money is not spite.

    • I recall that back in 2009 Republicans where saying that the stock market would just get worse because of Obama’s policies and I’m sure people like Hannity (who repeated this message often) managed to convince a lot of their conservative followers to get out of the stock market. I’m glad I didn’t. I put more money in my 401K and it is in great shape, so I am glad I did not listen to those folks back then. Those conservative leaders should apologize to their followers for their incorrect claims. I think you are smart not to move all your money out of the stock market. Even if it does go down some, it will rebound and you’ll be glad you bought when the market was down. It would be interesting for you to post a follow up to this blog post in 1 year so we can see where things end up no matter who wins the election.

      But I’m wondering, do you still think a GC tax increase would really be based on spite?

  7. I think there are two reasons for a tax.
    A) Raise revenue as efficiently as possible by taxing inelastic goods. This means to generate government revenue (as much as possible) while hurting the industry as little as possible. A good example of this would be “Sin Tax” on alcohol and tobacco, because demand does not fall sharply as prices increase (due to taxes). Investments are more elastic, and thus not an intelligent source of money to tax. When your gains are taxes at 28% and your losses are not subsidized at such a high level, you’re encouraged to avoid risk because gains are less valuable. Since it’s elastic, you see decreases in investment when you raise the tax. The decreases are so drastic in the short run that you actually have a decrease in revenue.

    B) Social Engineering, that is to encourage or discourage behavior. This reason was recently upheld when the the Supreme Court upheld the Obamacare tax which encourages you to purchase health insurance. You could also argue that the “Sin Tax” does this in discouraging the use of alcohol and tobacco.

    That being said, high capital gains taxes are either not very economically savvy or there is another motive.

  8. 1. Why are you only talking about the short term? Aren’t we better off talking about the long term? And in the long term higher GC taxes bring in more money.

    2. You believe rich people should pay a smaller percent in taxes than poor people, right?

    3. Do you think we should just eliminate the GC taxes? If we at least dropped it to 1% then by your logic the gov’t should make a ton of money, but only in the short term.

  9. 1) I concede to your point, partially. Both long term and short term do matter, so on that point I agree. I do not agree that high capital gains taxes will yield more long term government revenue. Yes, they are worse in the short run than the long run, but there is a sweet spot and I believe it is less than 28%. To illustrate my point, I think you can understand that I 99% tax would be bad for investment in the long run and essentially end the stock market since risk would almost never be worth it. Conversely, if the tax was only 1% then there would be money left on the table and raising the tax wouldn’t hurt investment much. There is essentially a curve and you want to find the inflection point. History has shown that in the short run that inflection point is below 20%, I can’t speak to the long run, but I’d be willing to be it is below 25%.

    2) I think an equal percentage across the board on income after the first $X that takes you to the poverty level. You shouldn’t be taxed on the dollars that bring you to the poverty line, whatever that is, but after that a 20% tax rate or whatever economists deem would balance govt. revenue with economic incentive seems reasonable and moderate.

    3) I spoke to this in my first response, but it should be very low during the recession and should be permanently capped at a reasonable rate that doesn’t make investors risk averse.

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