- The Washington Times - Monday, April 5, 2010

ANALYSIS/OPINION:

It was eerily awkward to hear President Obama’s promise at the State of the Union address earlier this year to eliminate all capital gains taxes on investment in small business. And then, to see virtually no reporting of this commitment. After all, he had never promised to lower any taxes on those making more than $250,000; indeed, all he had promised was to reverse the President George W. Bush’s tax cuts and increase taxes on the rich.

Maybe the liberal media did not want to report on such a tax cut from fear the general public and small-business employees might like what they see, hold the president to his promise, and start demanding more business-friendly policies. And maybe, by contrast, the conservative media did not report it because they did not believe what he was saying. They must have no way to navigate through the fog from empty speech after empty speech.

Well, both sides would be right, because in his budget released less than a week later, the president committed himself to raising the capital gains tax on those making more than $250,000 from 15 percent to 20 percent, with no hint of any reduction of the existing rate on those making less. Of course, doing anything to the capital gains tax for those under $250,000 is more or less irrelevant, since most venture capital investing is done by wealthy individuals.

The question should be: how much is this going to slow the economy down? One can only remember the effects of the luxury tax in the early 1990s that was levied on items that our government thought only the rich would buy. In other words, if you were wealthy enough to buy it, Uncle Sam wanted to figure out a way to capitalize on it as well. However, many companies in luxury-good markets were hit extremely hard. Uncle Sam had to realize that this tax was doing more harm than good and repeal this tax. What is happening now isn’t much different. Doesn’t this administration realize that we need high-growth investment from businesses? I don’t see anybody else doing it.

It is a different matter to change the tax accounting for hedge and equity fund managers, who today get to pay lower capital gains taxes on earnings from hedge and equity partnerships even though they have no personal funds at risk. Warren Buffet was heard once to remark that this put him in a lower bracket for much of his income than his secretary. Yet, congressional efforts to change the tax code to require ordinary-income treatment for this kind of partnership income for wealthy Wall Street bankers have repeatedly been blocked by, guess who, Wall Street bankers.

But raising and not lowering the tax on venture capital investment in highly risky start-ups, most of which fail and most of which are hundreds of times more risky than hedge and equity fund investing, is an entirely different matter if you are trying to restart growth in the economy and you made a promise to do so in a nationally televised address to the nation. One can only assume that Mr. Obama is looking right while going left. Yet there appears to be no one around who is willing to hold his feet to the fire. If he promised policy that could potentially create jobs and alleviate our nation’s economic stress, then the American people should demand some answers.

No wonder that there is some cynicism about Mr. Obama’s highly public promises — such as his promise to provide more transparency in government. Recall also his very public (and positive) recognition of Congressman Paul Ryan at his now-famous televised appearance at the Republican retreat just two days after the State of the Union address, where he described the congressman as a “sincere guy” with “some ideas in there [his budget proposal] that I would agree with.” Within days, Mr. Ryan’s proposal had been thoroughly attacked by the Democratic National Committee at the insistence of the White House.

The issue of capital gains taxes on innovation is not trivial — innovation needs investment to thrive and survive. In addition, if innovators know there will be a reward for their work, then they will do what they do best: innovate. I highly doubt that in our free country that one will find citizens who are willing to pour their life, including their resources, into a project that won’t benefit them in some way. And in the game of business and market innovation, that way is a financial reward.

It could be argued that President George H.W. Bush lost re-election because then Senate Majority Leader George Mitchell blocked enactment of the cut in 1989, using that issue to introduce the Senate practice of requiring 60 votes for most legislation. If Mr. Bush had been successful, it is unlikely that his later agreement to raise ordinary income rates slightly would have caused as much trouble for him politically as it did.

Given the high drama of a proposed reduction in the capital gains rate 20 years ago, one might have expected more public debate about a total elimination of the tax on small business, which even the most conservative Republicans have never had the guts to seriously propose. But, then again, maybe the media silence is appropriate, because the commitment was apparently never meant seriously to begin with.

“The Armstrong Williams Show” is broadcast on XM Satellite’s Power 169 channel from 9 to 10 p.m. weeknights.