Do we want to motivate people to create wealth or not? It’s the unspoken question, the elephant in the room, when President Obama attempts to whip up the populace with stories of “billionaires paying lower tax rates than their secretaries” and other class-warfare demagoguery.
Mitt Romney recently said his effective tax rate is probably close to 15%, because most of his income comes from long term capital gains. The admission hasn’t helped his campaign much, to be kind. Warren Buffett has famously said similar things, and has become the President’s biggest gift in his drive towards wealth redistribution.
Nearly since the beginning of the income tax, the government has treated long term capital gains differently than “ordinary income.” In 2003 the long term capital gains rate was cut to 15%. Why are we surprised to see that people like Romney and Buffett have matched their behavior to the incentives? Surely even President Obama understands the concept of incentives. Under certain conditions, section 2011 of his Small Business Jobs Act of 2010 establishes a particularly favorable long term capital gains rate: 0%.
Presumably what everyone’s attempting to foster here are wealth creation and capital formation. From wealth comes the ability to invest, which creates jobs and, if created via free market capitalism — as opposed to crony-capitalism — advances society. The opposite of wealth of course is poverty. We see endless government reporting and programs attempting to alleviate the latter, but little understanding of the need to create the former. If we want less poverty, we need to create more wealth.