Obama's Increased Capital Gains Tax on the Rich Will Hurt the Middle Class

In the State of the Union address, President Obama argued that the rich should pay higher taxes on their wealth so the middle class can be strengthened by increased tax breaks.  Of course, this is the classic populist, class-warfare, and wealth redistribution argument that Democrats have used forever.

It is based on the false promise that raising taxes on the rich will somehow reduce income inequality in America.  Quite frankly, this is an admission by the President that the middle class is hurting under his watch. Yet, despite all of the tax increases on the rich over the years, we have the greatest gap in income distribution in this country's history.

In the President's latest tax-the-rich scheme, he proposes raising the capital gains tax to 28% for those couples making $500,000 or more; arguing that this is the same tax rate we had under Ronald Reagan.  In doing so, he knows that the Republican-controlled Congress won't buy into it because they believe, like I do, that raising taxes on capital gains stifles innovation and the growth of businesses.  Also, the Reagan argument is a canard because 28% was the top tax rate for everything in Reagan's days of tax reform. Today, the top rate is 39.6%.  Also, that 28% is in addition to a 3.8% surcharge for ObamaCare that didn't exist when capital gains under Reagan were at 28%.  But, forget all those "lies" about taxes under Reagan.  In the mind of any Democrat like Obama, all they can see are a bunch of rich people making even more money by investing in stocks.  That, of course, is a very naive view of what happens when wealthy people invest in the market.

When you or I buy 100 shares of a stock, we will do very little to effect its price.  But, when a rich investor buys 5,000 or 10,000 or even more shares of a stock that you own, it's a big thing and, the  price will jump on a trade like that.  Further, it sends a signal throughout the investment community that your stock has some big investor(s) interested in it.  This, in turn, attracts more buyers and the price will climb on increasing buy-order volumes.  Simply, big investors help raise small investors up as well. So, every day, the 50% of the middle class that own stocks are being helped by wealthy investors.

So, why is a new 28% tax on capital gains so bad?  It means that big investors will have 28% less money available to reinvest and, thus, pull more small investors -- mostly in the middle class -- along with them.  Since taking office, Obama has already raised the top capital gains rate from 15% to 23.8% plus a 3.8% ObamaCare tax on investment.  Now, he wants 28% plus the 3.8%.   

Every time the Democrats attempt to tax the rich, they end up hurting the little guy in some fashion.  In 1990, the Democrats thought they had the perfect tax-the-rich scheme by creating a luxury tax on expensive cars, boats, jewelry, and furs. It backfired when consumers stopped buying as many items in these categories.  As a result, thousand of workers in those related industries lost their jobs.  Some businesses went belly up.  Ultimately, in just two years, the same Democrats who passed the luxury tax had to repeal it in order stop the bleeding of jobs and businesses.

Now, in another attempt to tax the rich and help the middle class, Obama may wind up hurting the very people he intends to help.

References:

Obama’s proposal to raise the capital gains tax drives sharp wedge between parties: http://www.washingtonpost.com/business/economy/obamas-proposal-to-raise-the-capital-gains-tax-drives-sharp-wedge-between-parties/2015/01/20/85eafb64-a0c1-11e4-903f-9f2faf7cd9fe_story.html

Only half of all middle class Americans invested in stocks: Down from 66%: http://money.cnn.com/2013/05/09/investing/american-stock-ownership/

IRS Announces 2014 Tax Brackets, Standard Deduction: http://www.forbes.com/sites/kellyphillipserb/2013/10/31/irs-announces-2014-tax-brackets-standard-deduction-amounts-and-more/

Paying Obamacare's 3.8% Investment Tax?:  http://www.forbes.com/sites/robertwood/2014/04/10/paying-obamacares-3-8-investment-tax-if-you-like-your-investments-keep-your-investments/

Special Report: 25 Years After [Reagan] Tax Reform: http://www.forbes.com/sites/janetnovack/2011/10/21/special-report-25-years-after-tax-reform-what-comes-next/

The Democrats Still Haven't Learned From Their 1990 Tax-The-Rich Fiasco: http://cuttingthroughthefog.blogspot.com/2012/07/the-democrats-still-havent-learned-from.html

The Obama tax proposals: Tailored cuts and hikes: http://www.usatoday.com/story/money/2015/01/20/obama-tax-proposals/22064109/