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Monday, April 21, 2008

Charlie Gibson, Agent of the GOP?

(Long, boring economic post. Read it, you might learn something.)

The one thing you couldn't miss since last week was the furor over the debate on ABC. To read liberal blogs you'd think Charlie Gibson and George Stephanopulos are probably McCain staffers working under deep cover for ABC.

To the liberals defense, they probably did spend a little too much of the debate on the "gotcha" stuff that's been running around the news lately on Bosnia, Rev. Wright, etc. While they shouldn't have ignored the subjects, they could have cut that part short.

The second biggest uproar, though is over the question, and follow up, to Obama on capital gains taxes. EJ Dionne over at the Washington Post said Gibson "sounded like a lobbyist for tax cuts for the wealthy".

For those who don't know, you can download all of the IRS tax data and look at the numbers yourself. What you find is that not only with capital gains, but income taxes, the lower rates generate more, not less income, generally after a 1 year drop off.

Obama's answer that he wants to raise rates so hedge fund managers pay more is a joke. Kind of like the Alternative Minimum Tax of the 60's, used to catch 14 millionaires then, that 20 million paid this year, Obama's tax hike would hit 100 million tax payers, 50% of whom made less than 75K last year. That's only the direct hit. Not bad, to get a few thousand managers to pay more taxes we hike them on 100 million others.

The truth is, that the tax hike hits more than 100 million. If you have a 401(k), IRA, etc, you will pay it also, just not directly. This is what confuses the folks defending the tax hike. Capital Gains don't show up as a tax on those, you pay standard income tax rates on your withdrawls.

But someone does pays capital gains on the investments in those accounts. The funds companies pay that rate. That means that you, the holder of an IRA get less money as a return on investment and pay a higher service fee on the account to pay those taxes. Loaded mutual funds will see higher loads and lower returns for the same reason. But since they are "hidden taxes" some folks claim you don't pay them.

The other arguement on capital gains is that it reduces available investment income. Those hedge funds and venture capital funds, which are used to start up businesses, suffer under higher rates. That tightens money supplies (which is already a problem) for folks trying to start or expand a business.

Gerald Jackson wrote a great piece about how the Laffer Curve works last September. The Laffer Curve says that lower tax rates increase tax receipts due to the availability of income to invest. It's been a counter intuitive piece of fact for Democrats since JFK died. Kennedy cut tax rates to increase productivity and the economy, it worked. But since then the left has decided that imperical evidence be damned, higher taxes are needed.

Jackson applied it specifically to capital gains, and the availibility of capital to start businesses. When the rates gone down our economy expands, when it goes up, that expansion slows, or stops.

The reason is simple, but again counter-intuitive to those who refuse to believe data. You see, capitalists don't take their earnings and stuff them in a mattress so they can roll around in it late at night. When an investors make money they generally re-invest it into something else, to make more money.

Higher capital gains rates make less money available in two ways. The obvious is the extra money going to the government, not being reinvested. The less obvious, but proven true, is that the number of transactions that incur capital gains taxes goes down as the rates go up. Investors don't sell as many stocks to realize the gain with higher rates. Since the higher rate causes the rate of return to fall, they end up holding stocks longer, and therefore don't have "reinvestment" capital available as often. This prevents folks who need that capital to start or expand a business to have a more difficult time finding it. That affects you if you need a job, or want to go into business yourself.

For those who had fits about Gibson's return to the original question, as EJ Dionne did, get over it. He did what a moderator should do, he called BS on the answer. If more moderators would do it, and ask for answers tied to facts, not sound bites, we might all learn a little more about our politicians.

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