NCPA - National Center for Policy Analysis


April 30, 2008

After Senator Obama let it be known that he'd consider nearly doubling to 28 percent the current capital gains tax rate of 15 percent, he had to expect questions, says the Wall Street Journal.  Since then, he's done some homework on capital gains.  In a weekend interview on Fox News Sunday, Obama was asked again about raising capital gains rates.  Though still leaving open the chance of a higher rate, he suggested only going up to 20 percent.

While withdrawals from 401(k)'s, where Obama says most Americans have money invested in the stock market, are taxed at ordinary income rates, this does not mean that the stock holdings in tax-deferred mutual funds are somehow fenced off from rising and falling values in the market.

However, according to the Journal:

  • If investors see an increase in capital gains taxes in the offing, even to 20 percent from 15 percent, many will cash out before the new rate goes into effect.
  • Unless Senator Obama can guarantee that the economy will be in a strong growth spurt when he imposes a higher capital gains tax rate, it's likely that share prices will fall, causing a decline in the value of the 401(k)'s held by average Americans.

Indeed, Obama should reconsider his belief that capital gains are mostly the province of the wealthy, says the Journal:

  • Millions of middle-class Americans do in fact realize investment gains annually.
  • In 2005, according to IRS data, 47 percent of all tax returns reporting capital gains were from households with incomes below $50,000, and 79 percent came from households with incomes below $100,000.

Obama no doubt will encounter questions again about his plans for taxing capital gains.  The more he looks at the issue, the more we suspect he'll discover that it matters to the people whose votes he's seeking, says the Journal.

Source: Editorial, "Obama Gains," Wall Street Journal, April 30, 2008.

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