The Magazine

Tax Cuts, Real and Imaginary

Obama's spending programs in disguise.

Sep 15, 2008, Vol. 14, No. 01 • By NEWT GINGRICH and PETER FERRARA
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With two-thirds of the American people now owning stocks, capital gains taxes are another middle America issue. Obama proposes to increase the top capital gains tax rate by 33 percent, which will cause a decline in the value of stocks held by middle-income families. History has also proven, time and again, that rising capital gains tax rates cost the federal government money. From 1968 to 1975, the capital gains tax rate was raised four times, and capital gains tax revenue fell by more than 50 percent. When capital gains tax rates were raised by 40 percent as part of the compromise in the 1986 tax reform act, revenues fell by 40 percent the next year, and by 1991 they had fallen by 63 percent.

McCain is proposing to retain the current capital gains rate of 15 percent. But to maximize economic growth for working people and middle-income families, the capital gains tax rate should be zero. The capital gains tax is just another layer of taxation on capital income. It taxes the present discounted value of future income that will be taxed again--multiple times, in fact--when it is earned. That is not fairness or good economic sense. Many of our international competitors maintain a zero tax rate on capital gains--including 14 out of 30 OECD countries, China, Taiwan, Hong Kong, and Singapore. Eliminating the capital gains tax would cause the stocks held by two-thirds of the American people to soar in value.

The most important middle-income tax issue, however, is payroll taxes--the taxes withheld by your employer to pay for programs like Social Security and Medicare. The federal payroll tax is now the largest tax most workers pay. With federal income taxes already abolished for the poor and lower middle-income workers, and almost abolished for middle-income workers, the next big tax cut for these working people would be the ability to utilize personal accounts for Social Security.

Over time, personal accounts could expand to replace the entire payroll tax and finance the same benefits. Instead of paying a tax, working people would be saving and investing in their own personal family wealth engine. With fully expanded accounts, average families could expect to accumulate a million dollars or more, even while paying in about 25 percent less than the current 15.3 percent payroll tax. Such accounts are estimated to pay at least twice what Social Security currently promises and provide the only real hope of addressing the long-term funding problems of Medicare without harming retirees.

This would be nothing less than a revolution in the personal prosperity of working people. McCain at least favors starting such personal accounts. But, as is so typical of Barack Obama, he would just slam the door on a truly revolutionary change, and hark back to the stale ideas of the 1960s or even the 1930s. Obama's tax policies would take America in exactly the opposite direction of the tax reform and threaten economic disaster in already difficult times.

Newt Gingrich is the former speaker of the House and chairman of American Solutions for Winning the Future. Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation, and general counsel of the American Civil Rights Union.