President Obama is turning his attention to economic inequality. In Obama's view, your portfolio is unfair, unjust and diminishes others and he's going to stick it to investors and the affluent.
This article is published with permission from InvestmentU.com.
With his polls numbers the lowest of his presidency, Barack Obama has decided to use the bully pulpit to press what he believes will be a new winning agenda: economic inequality.
Better touch your wallet…
Polls show Americans are worried about jobs, the economy, health care costs and immigration issues. They are not terribly concerned about whether the Smiths make more than the Joneses. Yet, Obama has made it clear that economic inequality will be a primary focus going into this year’s elections.
For such a smart guy, President Obama doesn’t seem to understand much about the free-enterprise system. In his memoir Dreams From My Father, he wrote that in his one job in the private sector he felt like “a spy behind enemy lines.”
Equating the private sector — our nation’s great engine of growth and prosperity — with “the enemy” is no way to improve your standing in the business community. Yet that line was not inconsistent with some of his other comments.
Off teleprompter, he ad-libbed, in a now-famous speech in Roanoke, Va., “If you’ve got a business, you didn’t build that. Somebody else made that happen.”
Yes, all businesses rely on roads, bridges, airports and the Internet. But it takes discipline, skill and an outsized appetite for risk to turn those assets into revenue, profits, employment opportunities and tax revenue. His remark was rightly seen as a gratuitous slap at small-business owners and investors.
In his speeches on inequality, Obama insists that America is in danger of becoming a nation where success is reserved for a fortunate few. Parse these words. Economic success is “reserved,” not earned. It accrues not to hard workers and risk-takers but to “the fortunate” or “the privileged.”
Demonization precedes confiscation.
In an early interview with Charlie Gibson, who pointed out that cuts in the capital gains tax rate have historically increased government revenue and reduced the deficit, Obama replied that he still favored “raising the capital gains tax for purposes of fairness.”
He meant it. And you’re going to feel it come April 15. Obama signed into law a bill that raised the top marginal tax rate to 39.6%. He raised the top short-term capital gains rate to 39.6%. He raised the top long-term capital gains tax rate from 15% to 20%. He raised the top tax rate on ordinary dividends from 15% to 20%. And he put an additional 3.8% tax on dividends to pay for Obamacare.
Feeling more equal yet?
Disgusted, you might think about chucking it all and just putting a big slug of your portfolio into tax-free munis. But that’s just how he imagined you’d feel. The Obama administration has already proposed limiting the amount of tax-exempt income you can earn on municipal bonds.
Why is Obama sticking it to investors and the affluent (who tend to overlap)? Because polls show he can get away with it. Data from Pew Research reveals that the majority of Americans have no money in stocks. And not just individual stocks. Fifty-three percent have no money in equities through mutual funds or retirement accounts either.
The sad part is Obama is hurting the people he claims he wants to help. Just as the employer mandate in Obamacare motivated small-business owners to replace full-time workers with part-time employees, higher corporate taxes and income taxes discourage business formation and expansion.
Higher taxes on capital investment discourage risk-taking. And even if you are a strong supporter of a European-style social safety net, you can’t pay for it unless you have a robust economy throwing off ample tax revenue. (Otherwise you get economic sclerosis and smothering deficits like Western Europe is grappling with.)
In addition, the U.S. is not nearly as unequal as progressives would have us believe. The Census Bureau definition of “income” excludes transfer payments like Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and even costly employee tax benefits like health insurance. It also ignores federal, state and local taxes, which can exceed 50% of income for high-wage earners.
Of course, redistribution doesn’t solve economic inequality anyway. Sweden is the most redistributive nation on Earth — and economic inequality there is greater than it is here in the U.S. So what is the goal here exactly?
The U.S. already has the most progressive tax system in the world for individuals and the world’s highest corporate tax rate. According to the IRS, the top 10% of income earners pay over 70% of all income taxes. The bottom 50% pay 2%.
How much should high-income earners and investors pay: 80%? 90%? All of it? We should have a national conversation.
When freedom dies
The sad part, of course, is that while Obama focuses on economic equality, he ignores economic freedom. According to the 2014 Index of Economic Freedom, released last week by the Heritage Foundation, our economic freedom eroded steadily over the last five years. In fact, the U.S. has now dropped out of the top 10 most economically free countries.
What a shame. There was plenty of equality in Stalin’s Russia, Mao’s China and today’s North Korea, but very little freedom.
That’s no coincidence. As Will and Ariel Durant observed in The Lessons of History (1968), “freedom and equality are sworn and everlasting enemies, and when one prevails the other dies… to check the growth of inequality, liberty must be sacrificed.”
Some may argue I’m overstating my case, that Obama is a friend of capitalists and investors. But if so, why has he taken absolutely no credit — even during the 2012 election campaign — for the booming stock market?
Two reasons. The first is that entrepreneurs and investors are not his natural constituency. The second is that nothing increases inequality like rising investment values.
In Obama’s view, your portfolio is unfair, unjust and diminishes others. You haven’t heard the last from him on this subject.
Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.