Wednesday, February 6, 2008

Obama The Moderate?

Obama's Plan for the Tax Man (From Barrons)

WELCOME TO OBAMA-NOMICS 101. If you're wondering how the young candidate would impact Wall Street if he wins the presidential marathon in November, here's the bottom line: He would hike most rates on dividends and capital gains from their current top of 15% to between 24% and 25% in order to generate new revenue and pay for middle-class tax simplification. So says Austan Goolsbee, a University of Chicago professor who advises Obama on economic matters.
"That's less than the 28% rate under Ronald Reagan, and more than the 20% rate under Bill Clinton," Goolsbee told us last week. And raging bull markets occurred during both their presidencies.

TO INSURE AGAINST A NEGATIVE impact on innovation and new business formation, Obama would have a zero rate on capital gains for entrepreneurs, venture capitalists and small-business owners forming new enterprises.
"He is being careful not to disturb innovation," said Goolsbee. Most of the highest taxes, he says, would fall on "gains from the past."
Supply-siders claim that a tax hike on capital will seriously retard capital-gains realizations and consequently reduce revenues to the U.S. Treasury. A pro-supply-side editorial last week in our sister publication, The Wall Street Journal, notes that the Congressional Budget Office estimated collections under a 20% rate from 2003 to 2007 would have netted $260 billion. However, collections under the 15% rate for the same period are $470 billion.

Goolsbee says you will always experience a short-term "unlocking" effect when you lower rates after the market has run up. The surge makes it appear that the tax cut pays for itself. But once those gains are cleared out, he argues, then the lower rates result in lower revenues. As for ordinary income, Obama would allow the top marginal rates to return to the Clinton era's 39.6% versus 35% today. Obama would also eliminate all tax shelters and loopholes, Goolsbee says.

For moderate wage earners who take the standard deductions, tax filing would be simplified. The Internal Revenue Service would figure out their taxes for them and send them a one-page form to sign, reducing preparation costs.
We asked him if Obama thought that corporate rates were too high, and were hurting the competitive position of the U.S. "He hasn't gotten into that yet," says Goolsbee. His own view is that while the statutory rate is high, the actual rates paid are not: "There is a great deal of variability in rates, and that is disturbing in what it says about loopholes and who is connected."
Ideally, he concedes, you would eliminate all loopholes in return for a lower rate. But in the sausage factory of the U.S. Congress, the temptation would be to keep the loopholes and lower the rate, he says, reducing revenues.
So there you have it, Wall Street: a preview of life under President Obama.

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