The key to capitalism is capital investment.  The key to successful capital investment is yielding a profit — a gain in the value of the capital investment:  a capital gain.  The capital gain represents value that has actually been created — new value, new wealth that can lead to innovation, jobs, economic prosperity.  Whether the investment is real estate, or a factory, or stock and mutual funds for a pension or retirement account, capital investment is the engine of a free market economy, fueled by the desire for making a profit — a capital gain — on the investment.  The government then taxes that capital gain, even if the money used in the initial investment has already been taxed as a wage, inheritance, or even a previous capital gain.

Both Democratic candidates for President have already supported an increase in the capital gains tax.  In votes already taken in the Senate, both have voted to increase the rate from its current 15% to 20%.  Sen. Obama has advocated a further increase to 28% on the rate. 

Increasing the capital gains tax rate by definition increases the intrusiveness of government on individuals and the economy; thus, the Democratic contenders are advocating less liberty for American citizens and more power for the government, as well as greater economic inefficiency.  They are also decreasing the value of investing in capital in the United States — any investor makes his decisions based on the potential return; increasing the amount of any profit due to the government reduces the potential return.  If a potential capital investor has a choice between two options with probable equivalent returns yet one investment's profit is taxed at 28% and another is taxed at only 15% (or not at all), where is the investor's money most likely to go?  Which investment has a competitive advantage, and which investment has a competitive disadvantage imposed by the government?.

To evaluate the relative competitive aspect of raising the US capital gains tax rate, it is instructive to compare the US rate to that imposed by the governments of other countries.  Following are some various top rates for comparison (source:  Australian Treasury, "International Comparison of Australia's Taxes, p. 208):  Australia:  24.3%; Austria, Belgium, Czech Republic, Germany, Greece, Mexico, New Zealand, Switzerland, and Turkey:  0%; Canada: 23.2%; Iceland and Japan:  10%; Italy:  12.5%; Ireland:  20%; Slovakia:  19%; United Kingdom:  40%; Denmark:  62%, Sweden:  30%.  Thus, raising the capital gains tax even to 20% would be putting the US economy at a capital investment disadvantage relative to other potential investment opportunities, and increasing the tax to 28% would take the US even further behind competitively, particularly when compared with our two biggest trading partners, Canada and Mexico.

Competitiveness aside, what is the purpose of taxation?  Ostensibly to raise the revenue necessary to fund the activities of the government.  Obviously, there is considerable debate about what those activities should be, but ultimately the purpose of taxation is funding the government.  However, looking at the history of the capital gains tax provides some interesting information — raising the capital gains tax paradoxically tends to produce less revenue, not more, while decreasing the capital gains tax tends to produce more revenue.  This has consistently occurred in every single instance over the past 50 years.

The capital gains tax was increased in 1968, increasing from 25% to 36.5% phased in over 4 years; not only did capital gains tax revenues decrease, it took 8 years before revenues reached 1968 levels again.  Think about that again:  the tax rate was raised in 1968, but revenue didn't break even until 1976!  The rate was cut back to 20% in 1979, and revenues immediately increased, with the government collecting new record revenues each year until 1986 — that's 7 straight years of record-setting collections following a cut in the capital gains rate.  The string was ended in 1986 with an increase in the rate back to 28%.  This time, it took ten years for revenue collections to reach 1986 levels.  The rate was cut to 20% in 1998, then 15% in 2003.  In both cases, revenues once again increased.

The evidence is clear:  raising the capital gains tax does not increase revenue to the government.  Without exception, each time the government has increased the rate, collections have decreased.  Without exception, each time the government has decreased the rate, collections have increased.  So raising the capital gains tax rate doesn't merely hurt the competitiveness of our economy compared to other countries, it actually fails to increase revenue to the government.

Which begs the question:  why do Senators Obama and Clinton make raising the capital gains tax rate a central part of their economic platform if it hurts the economy, hurts our competitiveness, and fails to generate revenue?  When presenting with the facts during a debate, Sen. Obama made an astounding statement:  that the rate needed to be raised to promote "fairness".  Thus, he made it apparent that a legitimate function of government is to punish one group of people using tax rates.  Apparently, it is "fair" to confiscate wealth from an arbitrarily chosen group of people, regardless of whether or not it brings in additional revenue to the government.  Apparently, it is more "fair" if certain people pay more in taxes.  Apparently, it is now a function of government to enforce some sort of "fairness" on people who happen to be investing in the economy.  One is tempted to ask where in the Declaration of Independence, Federalist Papers, or Constitution such a role for government is espoused.

But raising a tax rate to enforce some standard of "fairness" demonstrates even greater misunderstanding by Sen. Obama about the economy and capital gains taxes.  It is tempting to assume that it is largely "the rich" who pay capital gains taxes.  Yet the facts say otherwise.  Approximately 50% of tax returns claiming capital gains taxes are filed by people earning less than $50,000 per year, and 75% of the claimants earn less than $100,000 per year.  That's hardly "rich", and it seems hard to claim that increases the tax burden on these people is making things more "fair" for anyone else.

Just as Sens. Obama and Clinton ignored (and misrepresented) the facts in seeking to demonize free trade agreements, they now ignore the facts about the capital gains tax in seeking to engage in class warfare.  While both speak nostalgically of the 1990s economic boom, they both seek to undermine the policies that made that boom possible.  Rather than promising greater liberty for the individual, they are seeking greater control by an ever-intrusive government.