Obama’s Investment Tax Hike Will Harm the Economy

The business community and Washington are miles apart in terms of an economic game plan.

By SHARE

We’re now entering the heart of the football season. The cupcake portion of the college schedule is over, the first few tune-up games of the NFL season are behind us. Frankly, it is put up or shut up time on the gridiron.

Football is the ultimate team sport. A complex machine with 11 individual moving parts, each of whom must perform their individual role perfectly for a play to work. Gel as a team, almost regardless of individual talent, and you’ll succeed; remain divided and you’ll fail. As legendary Packers coach (Go Pack Go!) Vince Lombardi said, “People who work together will win, whether it be against complex football defenses, or the problems of modern society.”

The sluggish economy is today’s main societal problem and it will take a team effort to get it back on track. Unfortunately, our team is fractured and our locker room is in disarray. On the one hand we have Washington, whose main concern at this moment is racing back to their districts to fight for re-election. On the other hand are businesses, demanding an ounce of policy certainty before they begin to hire.

[Read more about the economy and unemployment.]

The debate over the expiring Bush-era tax cuts on the wealthy has dominated the recent headlines, but a more economically ominous tax debate looms. To businesses and investors--two of the main engines of job growth--President Obama’s proposed tax increase on capital gains and dividends is the central concern.

The president plans on allowing key, if forgotten, elements of the Bush tax cuts to expire for capital gains and dividends. If the plan becomes reality, the top tax rate on these investments will jump from 15 percent to 20 percent at the end of the year.

In essence, this is a tax on investment success, whether it be a profit made on the sale of a stock, or money received out of corporate profits. This will have a twofold impact. First, businesses and entrepreneurs are dependent on infusions of capital to grow and thus hire more people. Taxing investment in these businesses and entrepreneurs leads investors away from high-risk, high-reward ventures. Second, a Barclays Capital report finds that the tax increase will cause an 8.6 percent drop in the Standard & Poor’s 500 Index, a key indicator of stock market health. This means that those holding stocks, including retirement investments in IRAs and 401(k)’s, could see a dramatic reduction in their wealth. Less wealth leads to less consumer spending, just the thing our government has been trying desperately to stimulate.

For an economy attempting to claw its way out of a recession, these results could prove disastrous. As the Congressional Budget Office wrote in 2007:

[Taxes on capital gains and dividends] distort investment to some degree … Those distortions interfere with the allocation of investment to whatever use has the highest economic return. Consequently, they reduce economic efficiency and leave most people less well off.

Less well off is not exactly where most investors, or average citizens, would like to find themselves right now. It should come as no surprise then that the business community and Washington are miles apart in terms of an economic game plan. What is surprising is that the Democratic Party itself is torn over the potential tax hike. Forty-seven House Democrats have signed a letter asking House Speaker Nancy Pelosi to maintain the lower tax rates on investment income. [See where Pelosi gets her campaign money.]

By keeping dividends and capital gains tax rates linked and low for everyone, we can help the private sector create jobs and allow seniors and middle class households to save and invest more. A dividends tax increase would impede our nation's economic recovery by decreasing the amount of capital that companies would have access to, thereby slowing the private sector's ability to grow and create jobs.

Defeating this recession and winning back prosperity will take a perfectly played game. We cannot afford to have the government and the business community fighting to use two separate playbooks. Even more important, we cannot refuse to work together because it says “Republican” or “Democrat” on the back of our jerseys. People who work together win and this is a game we can’t afford to lose.

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