I thought it would be an interesting contrast to the Obama is a socialist rants -- and I'm curious what response left/heterodox economists would offer: ----------------------
Obama is proposing to effectively double capital gains taxes *and* close the "loopholes" that have often allowed venture investors to avoid the capital gains taxes over the last 25 years. We experimented with Obama's proposal twice in US history ('69 and '76 IIRC), which gave us the economic golden years that was the 1970s. In 1978 people had enough, a thorough re-implementation of capital gains tax structures was done by Congress, and Reagan was in the right place at the right time -- the economy is misattributed to him in many ways -- to inherit an economy that once again had a reasonably sane capital gains tax structure that we still use today.
The "loopholes" introduced way back then are a de facto capital gains tax break for investments in small-ish businesses in a very generic and unbiased way. Obama has essentially proposed eliminating the current structure and instead letting regulators and Congress pick and choose who qualifies for tax breaks, a completely unnecessary and incredibly malignant politicization of the small business finance process. If your venture is not anointed by the government, the government will impose a 28% tax on investment in your business, effectively allowing the government to pick and choose who lives or dies on a basis that has nothing to do with venture viability. Arguably worse, whereas the old structures used *tax deferrals* as an incentive across all small business investment, the new proposal is a *tax cut* for politically approved investments. In every other case where such regulatory structures have been put into place, it has immediately become deeply corrupt and subject to influence peddling. It is not obvious why anyone would want to change something that is not broken unless the goal *is* to increase the influence and benefit for the political class in the finance process. The whole "tax breaks for startup investment" is a huge red herring that preys on the ignorance of the population about the current tax code related to such things and the implications.
But more generically, raising the capital gains taxes is stupid in pretty much every philosophy of economics, with well-understood consequences. If the taxes are raised to the levels he wants, it *will* cause capital to flee US venture finance markets for better climes. Raising income tax or sales tax would be preferable, in terms of negative impact; if you want to raise taxes, do it elsewhere. A few directly relevant consequences:
- About 5 million US jobs are directly funded by this investment. A major percentage of these jobs will evaporate, like clockwork. More government jobs is a poor substitute.
- Private capital investment in R&D dwarfs public investment in R&D, and US investment in R&D is a major percentage of the world total, far disproportionate to its population and economy. If the capital dries up, so does the R&D that the world enjoys the product of.
- It will grossly distort the finance market and reduce average returns on investment by biasing capital toward inferior long-term yields. And then there is the basic loss of liquidity in the markets, as though we need more of that.
The talking point about capital gains tax rates under Clinton or Reagan is deceptive because it very much ignores relevant structural elements that Obama has stated he wants to eliminate but which greatly mitigated the negative impact of the tax rate structure at that time. Pure bait-and-switch. The closest historical analogue we have to Obama's plan is the 9-year window in the 1970s that proved to be a disaster economically. And historically, it only takes about two years for it to show up in the economy in a big way, so the downside will be owned by him and (presumably) a Democrat congress -- I can guess what the consequences of that might be.
Any policy proposal that doubles capital gains taxes and then replaces generic capital gains deferrals for small business and venture investment with tax cuts left to the arbitrary and capricious opinion of the politicians and regulators is so obviously flawed that I am puzzled why more people do not see it, and I have yet to have anyone explain to me why this is a good idea that will improve things. Would you want Bush and Cheney to have the power to impose a 28% tax penalty on investments they disapprove of? What sane person would want to give that power to government given its track record?
All in, it proves that the vast majority of the population cannot be trusted with basic matters of economics, since their opinions on such matters are about as informed as their opinions of quantum mechanics. Except that they are rarely given the opportunity to legislate the latter case.