The Capital Gains Tax seems to be the chink in Obama’s economic armor. He is capable of adequately defending all his other tax hikes, or really any other part of his plan, but the Capital Gains Tax hike appears indefensible. From an NY Sun article:

According to the Institute for Research on the Economics of Taxation, Mr. Obama’s tax hike would knock off $2.5 trillion in capital formation over five years, or nearly 2% of gross domestic product.

Even historically Capital Gains Tax hikes lead to slower growth while cuts leader to much fast growth, as illustrated by this graph (click for full size).

In all fairness, Obama has tried to defend himself, but his defense tends to amount to “fairness and equality”, some nice words but they don’t do much in terms for reassuring us economically. Obama:

We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.

However, McCain doesn’t not fair much better in terms of taxes:

Still, while there are some benefits to Mr. McCain’s plan, there are also “budget gimmicks” that hide the cost of the cuts, said the report. The report also said the McCain plan was likely to increase the deficit, which would lead to higher borrowing costs, and dampen economic growth. Under the McCain plan, “the positive effects of lower tax rates will be offset by the costs of increased government debt,” the report said.

And even though Obama doesn’t do well defending himself, there are other who do a much more convincing job. John Fout at The Street, wrote a great post about how slim the chances are that there will be a crash because of Obama. As Fout says:

Miller believes the Bush tax cuts will expire no matter what, because of a Democratic Congress. So, tax rates would go higher. Do investors decide to sell in order to book their gains and what would they do with the money? Putting money under the mattress won’t get the historical returns of the stock market.

You should read the whole article, as Fout offers much more than that one quote, but in conclusion:

The future under either an Obama or John McCain (R., Ariz.) presidency remains unclear. But it’s important to note that investors would not sell willy-nilly if Obama were to win the election. Don’t bet on the Obama crash.

So, the outlook for large growth is probably not great under either candidate. But luckily the outlook for a market crash is even slimmer. Despite what most of the media says, the Capital Gains Tax probably won’t be Obama’s undoing.

Last 5 posts by Jeffrey Miller

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