Economic conservatives have a special love for cutting capital gains taxes. Not only do they feel it is one of the most destructive taxes that exists, but it was the 1978 capital gains tax cut—along with Proposition 13 the same year in California—that really launched the supply-side tax revolution. Now Barack Obama says he wants to perhaps nearly double the capital gains tax rate. Here is what he told CNBC's Maria Bartiromo last week (boldface mine):
Well, you know, I haven't given a firm number. Here's my belief, that we can't go back to some of the, you know, confiscatory rates that existed in the past that distorted sound economics. And I certainly would not go above what existed under Bill Clinton, which was 28 percent. I would—and my guess would be it would be significantly lower than that. I think that we can have a capital gains rate that is higher than 15 percent. If it—and if it, you know—when I talk to people like Warren Buffett or others and I ask them, you know, what's— how much of a difference is it going to be if it's 20 or 25 percent, they say, look, if it's within that range, then it's not going to distort, I think, economic decision making.
My take: Obama got it wrong. The capital gains rate during the Clinton administration fell from 28 percent at the beginning to 20 percent with the signing of the Taxpayer Relief Act of 1997 in August of that year. Interestingly, the economy managed only two years of growth of 4 percent or more in the decade previous to the 1997 cap gains cut—but notched three straight years of such growth in 1997, 1998, and 1999.