Differences between the tax rate on earned income and the rate on income generated from capital gains has lent some success to President Obama’s envy-the-rich campaign. It has given Democrats the edge in demagoguery by implying that billionaires like Warren Buffett are taxed less than their secretaries. Never mind that Buffett’s total tax in actual dollars is likely several thousand times as great as his secretary’s.
As a sound bite, this inequity does sound unfair. But there are valid reasons for this difference in taxation rate, and they are connected to job creation. Taxing capital investment at lower rates encourages savings and investment, the lifeblood of economic growth and full employment. In addition, it keeps the wealthy investing instead of seeking tax shelters for their income and savings.
When people take their hard-earned money and invest it to start a business or purchase stock to help existing companies expand their businesses, they risk losing that money. This is the kind of risk-taking we want our tax rates to encourage. Lower tax rates on capital gains income provide a greater incentive to take such risks.
Obama’s ads attacking the difference between Buffett’s capital gains tax rate and his secretary’s income tax rate serve a strategy to generate class warfare. It would appear that for Obama, winning votes trumps policies that are in the best interest of creating jobs.