I haven’t written anything about the State of the Union speech because I thought it was a political exercise. This is the ‘silly season’ and truth is a rare commodity in political speeches right now (not that it is always there in other times). However, the Wall Street Journal posted an editorial today that makes some very good points.

This is the chart from the editorial:

As you can see, the federal tax rate on long-term capital gains has varied a lot over the years. The article points out the fallacy of the “Buffett Rule” that President Obama is proposing which would make wealthy Americans give more of their money to the government. The Congressional Budget Office reports that the effective income tax rate of the richest 1% is actually about 29.5%. That is the rate you come up with when you include all federal taxes–such as the distribution of corporate taxes. That is about twice the 15.1% rate paid by middle-class families.

Investment income has already been taxed once. There is no reason to tax it again unless you are trying to redistribute wealth.

The article points out:

As the nearby chart shows, the rate has never since risen above 28%, and the last time it moved that high was in 1986 as part of the Reagan-Rostenkowski tax reform that also cut the top marginal income tax rate to 28% from 50%. With income-tax rates so low, a differential was arguably less necessary—though it’s worth noting that capital gains revenues fell dramatically after that rate increase.

A decade later Bill Clinton agreed to cut the rate back to 20% as part of the balanced-budget deal with Newt Gingrich. Capital gains revenues soared, helping to balance the federal budget. Nearly every study estimates that the revenue-maximizing tax rate from the capital gains tax is between 15% and 28%. Doug Holtz-Eakin, the former director of the Congressional Budget Office, says that a 30% tax rate “is almost surely above the rate that maximizes tax revenues.” So it’s likely the Buffett trick would lose revenue for the government.

So if we are in a time of federal deficits, why would you change the tax code in a way that would lose revenue for the government? Unless you are using the tax code to redistribute wealth, it makes no sense.