Obama’s Curious Capital Gains Tax Epiphany

So why did he abandon any plans to sharply increase investment taxes?

By SHARE
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Presumptive Democratic presidential candidate Sen. Barack Obama speaks at a town hall meeting in the gymnasium at Robinson Secondary School July 10, 2008 in Fairfax County, Virginia.

Here's the question: Why did Barack Obama finally go with a smaller-than-expected suggested increase in the capital gains tax rate? Let me present what is, I think, a plausible answer in 10 easy steps (see "Did Obama Blink on Capital Gains Taxes?" for more details):

1) In September 2007, Obama (the primary election version) suggests a possible near doubling of the maximum capital gains tax to 28 percent on the grounds of fairness (big with Dem primary voters) and a need to raise revenue. (Why 28 percent? Because that was the top Bill Clinton cap gains rate inherited from Ronald Reagan.) But Obama leaves himself plenty of wiggle room, providing a range of between 28 percent and 20 percent, the latter being the rate that resulted from the 1997 Clinton-Gingrich reduction and was followed by an economic and stock market boom.

2) The economy (credit crisis, spiking oil prices) worsens, making tax hikes seem riskier.

3) Obama's numerous Wall Street backers accept that tax rates are going up but express unhappiness about the possible 28 percent rate.

4) In an April 2008 debate in Philadelphia, Obama doesn't seem to understand the link between cap gains rates and tax revenues and seems more interested in their equity (fairness) impact rather than their impact on equities (stocks, as well as the economy).

5) Hillary Clinton—whose advisers were quietly suggesting no cap gains tax hike—concedes in early June.

6) The campaign moves to the general, where tax hikes aren't as popular as in the Dem primaries.

7) In a mid-June 2008 interview with CNBC's John Harwood, Obama says he might "possibly defer" his tax increases depending on the state of the economy.

8) The economy worsens (unemployment rises, gas prices soar to record levels).

9) McCain, pushing for no new taxes, stays close in the polls.

10) Obama (the general election version) opts for the lower cap gains rate of 20 percent.

All this being said, sometimes it is the destination rather than the journey. As Larry Kudlow puts it on his blog:

The McCain folks are now slamming Obama's credibility on tax hikes and other issues. They infer that the young Illinois senator is a flip-flopper. Well, that's true. But some flip-flops are better than others. Sen. McCain flip-flopped on the Bush tax cuts and drilling. Bravo for that. And if Sen. Obama is flip-flopping toward lower investment taxes, so much the better.