Obama's Tax Plan: Welcome to 1929

Barack Obama doesn’t just promise a tax increase; he suggests raising almost every federal tax.

Obama proposes to sharply increase the marginal tax rates for almost every federal tax, just the opposite of President Reagan’s hugely successful supply-side economics that created the historic economic boom of the 1980s. It is the increase in these marginal tax rates that greatly harms the economy, because the incentives are turned against savings, investment, entrepreneurship, business expansion, job creation, work, and economic growth.

— Obama proposes to increase the top individual income tax rate by 13% and the second individual income tax rate by 10%.

— Obama proposes to increase the capital gains tax rate by 33%.

— Obama proposes to increase the tax rate on dividends by 33%.

— Obama proposes to raise the top payroll tax rate by between 16%-32%.

— Obama proposes a new payroll tax on employers to help pay for national health insurance.

— Obama proposes to reinstate the death tax, which is being phased out under current law, with a new top marginal tax rate of 45%.

— Obama proposes tax increases for corporations as well, such as the windfall profits tax on oil companies.

— Obama’s protectionist trade policies even suggest higher tariff taxes.

The Tax Policy Center estimates that Obama’s tax plan would raise taxes by $627 billion over 10 years.

Herbert Hoover Obama

With the credit crisis threatening our economy, there couldn’t be a worse time for these comprehensive marginal tax rate increases. Obama falsely says these tax increases would affect only higher income workers. The problem is that these higher marginal tax rates affect the incentives for savings, investment, entrepreneurship, business expansion, job creation, work, and economic growth and consequently add up to a devastating overall economic effect.

While Obama focuses his rhetoric on raising taxes on the rich, he has voted to raise taxes on the middle class in voting for Democrat party budgets that would let the Bush tax cuts expire.

The book to read is “The Forgotten Man” by Amity Shlaes, a detailed history of the Great Depression. Shlaes more recently pointed out that Obama’s economic policies are exactly what Herbert Hoover adopted to transform a 1929 economic downturn into the Depression: sharply increased marginal tax rates and protectionism.

Attacking Small Business

Most jobs in America are created by small businesses. Let’s look at the impact of Obama’s tax increases on a small business family. The husband has a steady job of his own, but the wife runs an unincorporated small business that stumbles for several years then starts doing quite well, employing five people. Together their family income reaches just over $250,000.

Under the Obama tax plan, their marginal income tax rate alone climbs to 39.5%. The payroll tax increase would add as much as 4 percentage points more, raising the total to 43.5%. State income taxes raise the total to close to 50%, over 50% in higher tax states like New York and California. If she sells the business, she must pay taxes on it again through the capital gains tax. If she saves the money from the sale, when the husband and wife die they may pay taxes on it again through the death (estate) tax. The total marginal tax rate they pay is higher than under Clinton, and much higher than under Reagan, who reduced the top federal tax rate down to 28%. Will the business continue to expand and hire more workers, or will the wife decide to slow down and spend more time with the kids?

Obama’s Corporate Tax Folly

American corporations already now suffer the second highest corporate tax rate in the industrialized world, a 35% federal rate, climbing to close to 40% on average counting state corporate income taxes.

Even in Europe, the average corporate tax rate has been reduced from 38% in 1996 to 24% today. All of the 27 countries of the EU have lower corporate tax rates than the U.S. Corporate tax rates are lower in booming India and China as well. Ireland adopted a 12.5% corporate tax rate 20 years ago. Since then it has climbed from the second lowest per capita income in the EU to the second highest. A 2007 U.S. Treasury study found that on a comparative basis Ireland raises almost 50% more in revenue with its 12.5% rate than the U.S. government does with its 35% corporate rate.

How are American corporations going to compete successfully in the global marketplace with this crippling tax disadvantage? These are the same corporations we are looking to for new jobs and higher wages. That is not going to happen if these corporations can’t compete.

With American corporations already uncompetitive in the world economy, Obama proposes the sheer folly of raising their taxes further by closing supposed corporate-tax “loopholes” and through punitive measures like the windfall profits tax.

Payroll Tax Punishment

Obama says his payroll tax increases would only affect families making over $250,000 a year. Obama’s payroll tax increases would drive the effective real return these families would receive from Social Security, even if all promised benefits are somehow paid, well below 0%. Yet the tax increase would close only a small fraction of Social Security’s long-term deficit, around 15%.

If the family has two workers, then their combined incomes would operate to push them over the threshold for this payroll tax punishment. Obama has not been clear about whether income other than wages can push a family over this threshold, such as rental income or capital gains.

Obama’s Flawed Tax Cut

When Obama says he would cut taxes on the bottom 95% of income earners, he is talking about his proposed refundable income tax credit of $500 for each worker, which is designated in his plan as going to all workers except the top 5% of income earners.

This is an entirely arbitrary giveaway, reminiscent of McGovern’s 1972 proposal to send a $1,000 check to everyone. Voters laughed that off as a cheap vote-buying ploy, not sound policy.

For almost half of the workers receiving the tax credit, it would involve not a $500 reduction in tax liability (because so many now pay little in federal income taxes), but another check from the federal government (because the credit is refundable, it would be paid to people who do not have $500 in federal income tax liability). In these cases, it would not be a tax cut, but more runaway government spending.

Obama’s New Tax Welfare

Obama has proposed a series of additional refundable income tax credits for low- and moderate-income workers. These tax credits would go primarily to those who are paying little or no federal income taxes now. Such credits would not reduce tax liability primarily but would involve checks from the federal government for child care, education, housing, retirement, health care, and some outright giveaways. These credits are not tax cuts. They are new federal spending programs hidden in the tax code.

With these tax credits, Obama’s tax plan is the opposite of tax reform. Tax reform involves closing loopholes and lowering the rates. But Obama proposes to increase the rates and create new loopholes through the tax credits.

It is free market conservatives who have proposed to begin replacing payroll taxes with personal accounts for Social Security. Over time, these accounts could and should be expanded to take over financing for all of the benefits financed by the payroll tax today, eliminating the payroll tax completely. Transforming the payroll tax into a personal family wealth engine directly owned by each family would produce a revolution in the personal prosperity of working people.

Read the longer print edition of this article here.