How Barack Obama's 'Buffett' Tax Hurts the Middle Class

Obama's tax proposals almost seem designed to throw the markets into another spectacular decline.

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One thing is certain about class warfare: Wherever it's being fought, whoever is leading the charge, it's the middle class that always loses the war.

The latest case in point is the "Buffett" tax proposed by President Obama and designed, in his words, to "close the loophole" in the present tax system that allows some millionaires to pay a lower average tax rate than you and me. (They still pay substantially more in actual tax dollars, of course, but that's another issue.)

This is the "loophole" that allowed Mitt Romney to pay an average tax of only 14 percent last year. Clearly the Obama White House thinks this will be an effective talking point as they hammer on Romney's wealth and present themselves as champions of the middle class.

[Read the U.S. News debate: Should the 'Buffett Rule' Become Law?]

Let's be clear about what that "loophole" really is. It's the capital gains tax rate. Capital gains taxes are paid on investment income, such as gains from stocks or sales of long-term bonds.

The wealthy often pay an average tax close to this rate because a lot of their income comes from their investments, and many of those investments are in the stock and bond markets.

Guess what. It's probably where a lot of your retirement savings are too.

Of course, unless you have a million dollars in taxable income, the Buffett tax won't apply to you directly. But it will affect the value of your Individual Retirement Arrangements and 401(k)s, and not in a positive direction.

[See a collection of political cartoons on the economy.]

The markets rise and fall according to supply and demand. The more people  who are buying in, the more stocks rise. Conversely, the more people who withdraw their money to put somewhere else, the more stocks will fall.

It's an economic axiom that the more you tax something, the less you'll have of it.

The left sometimes denies this, because they want to pretend that they can raise taxes indefinitely and it won't affect people's economic behavior in counterproductive ways—i.e. cause them to work less or, in this case, invest less.

But of course hikes in cigarette taxes are supported by liberals based on the assumption that a higher price will influence people's behavior, i.e. cause them to smoke less.

[Joseph Mason: The Other Buffett Rules]

If we tax millionaires more on their investments in the markets—the same markets where your and my investments are, not to mention most corporate and state government pension plans—there will be less investment in the markets. That means lower stock prices and less money in your retirement portfolio.

And Obama's Buffett tax is only one of the battle-axes he's wielding against your savings.

Come January 1 next year, the Bush tax cuts are set to expire. If Obama is re-elected and that is allowed to happen, the capital gains tax will rise for everyone from the present 15 percent to 23.8 percent, and the top rate on dividends will almost triple, rising from 15 percent to 43.4 percent (both including a special surcharge Obama slapped on investment income to help Obamacare).

It almost seems designed to throw the markets into another spectacular decline. In a recent oped in the Wall Street Journal, Donald Luskin, chief investment officer at Trend Macrolytics, estimates the combined effect would be a loss of over 33 percent in the stock market. Even if Obama were to revise the hike so that it only applies to the wealthy, the effect on the markets will be substantial and negative.

Despite the best efforts of the mainstream media to give it a positive spin, this has been the sickliest recovery in over 70 years.

[Read the U.S. News debate: Is Obama Turning the Economy Around?]

In a normal recovery we'd be roaring back by this time, not sputtering along worrying about another imminent collapse. The recession of the early '80s was in many respects much worse, but four years later, due to Reagan's progrowth, low tax policies, it was "Morning in America." Gross national product grew by 6 percent in 1983 and the market was climbing to record highs. Most importantly, low capital gains and other tax rates fueled an explosion in venture capital, which in turn ignited the computer revolution and the extraordinary creation of wealth the nation experienced over the next three decades.

Almost exactly four years ago, in the Democratic presidential primary debate, Charlie Gibson asked then-candidate Obama why he would raise capital gains tax rates even though it was a sure revenue loser.

"In each instance when the rate dropped," Gibson pointed out, "revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be effected?" [Italics added.]

"Well, Charlie," Obama answered, "what I've said is that I would look at raising the capital gains tax for purposes of fairness."

When Gibson pressed him on why he would raise the tax even if it lost revenue, Obama insisted it would be fairer that way.

[See a collection of political cartoons on the budget and deficit.]

At the time, many passed this off as mere ignorance on Obama's part. Few understood that his answer came from a deep ideological core that makes him want to "spread the wealth around," as he said to Joe the Plumber, even as there is less and less wealth and the spread becomes thinner and thinner.

It is the same ideological core that has convinced Obama to double down on the policies and the politics of class warfare leading into the 2012 campaign. This time we have no excuse not to believe he's not serious about implementing them—no matter how much we all become losers as a result.

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