Obamanomics Clarified

By Michael J. Boskin
Monday, August 4, 2008

In my July 29 op-ed ("Obamanomics Is a Recipe for Recession"), I was among the many who took Barack Obama's statements that he would "end the Bush tax cuts for the top incomes" too literally. I interpreted this to mean a return to the pre-Bush tax rates of 39.6% on ordinary income and 20% on capital gains.

The Obama campaign has now clarified that he proposes to do this for labor earnings, but not for capital gains and dividends. I am told that Mr. Obama declared last year that he would raise these rates to "no more than the Reagan rate," by which he apparently means to 28%, from the current 15%. Mr. Obama would thus raise the tax rate on capital gains by about three times as much as President Bush cut it, but he'd preserve at least some of the Bush reduction in the double-taxation of dividends.


The 28% rate on capital gains was the price President Ronald Reagan paid to pass the 1986 Tax Reform Act that lowered the top marginal tax rate on ordinary income (including dividends) to 28%. The capital gains rate was cut to 20% in 1997 under President Bill Clinton, and again to 15% in 2003.

However, Mr. Obama is proposing to raise the top marginal rate on wages (also interest, rent and royalties, etc.) more than 40% above the corresponding Reagan rate of 28%. Mr. Obama would thus give us the worst of both worlds: tax rates on ordinary income 40% higher than Reagan and on capital gains 40% higher than Clinton.

Raising the rate on capital gains to 28% would greatly reduce the ability of firms to minimize double taxation by returning cash to their shareholders through repurchases. As for dividends, the Obama plan would nearly double the tax to 28% from 15%.

I have revised the table that accompanied my op-ed showing the negative effects on the after-tax returns on investments to reflect the clarification. It is also available at http://www.stanford.edu/~boskin/. Please use the new table for reference purposes.

I'm glad to hear that Mr. Obama is willing to retain at least a portion of the Bush tax cuts on dividends. But nearly doubling the tax rates on capital gains and dividends to 28% is a terrible idea that would damage fragile financial markets and the economy.