Obama and (Even) Higher Capital-Gains Taxes

Barack Obama intends, if elected, to nearly double the capital-gains-tax rate to 28 percent—higher than the 20 percent rate when President Clinton left office—from its current rate of 15 percent. But capital-gains taxes may be going even higher. Consider this: There are plenty of Democrats, such as failed White House contender John Edwards, who want capital to be taxed at the same rate as income. And since they tend to be the same folks who want to repeal the Bush cut in the top marginal income tax rate, such a move would push rates for capital-gains taxes to a sky-high 40 percent. That would be as high as they have been since before the landmark 1978 cut in the capital-gains tax.

In a recent chat, Austan Goolsbee, Obama's economic adviser, told me that the candidate was not in favor of equalizing income and capital-gains rates. Yet consider this: Obama says he intends to, at minimum, make the budget deficit no worse. But in my conversation with Goolsbee, it was clear that the campaign is underestimating the size of the 2009 budget deficit by $100 billion or more. Goolsbee was unaware of private-sector estimates putting the deficit at half a trillion dollars and climbing, thanks to the weak economy.

To have a revenue-neutral budget under that scenario, Obama will have to either cut back on his spending plans or raise taxes even higher. And given that a President Obama would be dealing with even larger Democratic majorities in Congress, it would seem logical that higher capital-gains and/or higher income-tax rates would be a definite possibility.