In an article in the New York Sun, I praised the new Barack Obama tax plan as a great step in the right direction. This is true, but it is also a case of one step forward after two steps backward.

Earlier, there were indications that Obama might increase capital gains and dividend taxes to 28%, almost double the current level of 15%. Obama’s economic team announced that he would make the new top tax rate at 20% for capital gains, and as important, keep the tax rate for qualified dividends the same as capital gains at 20%. This linkage is very important because it encourages investment and equalizes the tax treatment of returns from investment through capital gains and returns from dividends.

However, Obama is still imposing a tax increase from the current 15%. This tax increase will decrease investment and lock up some capital in less productive purposes as investors may not choose to sell their investments and face a higher tax rate.

While Obama deserves credit for reducing his original proposed tax rate on capital, he also deserves some criticism for increasing the tax rate on capital from its current level.