Obama's Huge Tax Hikes Will Ruin Weak Economy

Barack Obama’s tax plan appears in written detail on his website and his top economic advisors have also published articles on it. This analysis is based on the undeniable facts in those published writings.

Obama’s Killer Tax Increases

Obama doesn’t just promise a tax increase. Like Walter Mondale in 1984. He has proposed to raise just about every federal tax. Most importantly, 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. Joe Biden thinks it is just patriotism for Americans to pay higher taxes so government spending can increase faster, saying recently on “Good Morning America”: “it’s time to be patriotic — time to jump in, time to be part of the deal, time to help America get out of the rut.” 

But that rhetoric doesn’t change the economic effect of raising these marginal tax rates. Raising taxes and government spending is not going to help America get out of the rut, but grind it in deeper.

Herbert Hoover Obama

With the credit crisis threatening our economy, there couldn’t be a worse time for these comprehensive marginal tax rate increases. Focused on neo-Socialist redistribution, 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, throughout the economy, and consequently add up to a devastating overall economic effect.

Moreover, 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 published last year. 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. Nobel prize-winning economist Robert Mundell has expressed similar concerns.

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, but 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. This is not in serious dispute. Even in Socialist 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. Canada has recently reduced its corporate tax rate to 19.5%, with a further reduction to 15% scheduled for 2012.

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.

John McCain is spot-on in proposing to reduce the federal corporate tax rate from 35% to 25%, the minimum for restoring American competitiveness. Obama mocks this as still more of the same tax cuts for big corporate fat cats and the rich. This is Socialist childishness. 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. While the economic effects would be much broader, we should ask why would we single out these hardworking, productive families for special punishment? 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%, at best.

If the family has two workers, then their combined incomes would operate to push them over the threshold for this punitive 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 from the sale of stock or real estate.

Who Pays Income Taxes?

Fully understanding Obama’s tax proposals and rhetoric requires a basic understanding of who is paying current income tax burdens. The latest data from the Internal Revenue Service and the Congressional Budget Office show that the bottom 40% of income earners as a group pay no federal income taxes on net. Instead they actually receive payments from the income tax system equal to 3.8% of all federal taxes paid. The middle 20% of income earners, the true middle class, pays 4.4% of all federal income taxes.
The top 1% of income earners now pay 40% of all federal income taxes, almost twice their share of national income. The top 10% pay 71% of federal income taxes. Clearly, federal income taxes are now paid primarily by these upper-income taxpayers.

Reagan’s Gift to Taxpayers

So when Obama claims we need to raise taxes on the rich so they will pay their fair share, we should ask what the heck is their fair share? And when Obama rails against Republican tax cuts for the rich, he shows his own economic confusion, and misleads the public. The Republican supply-side economics that began with Reagan, and Jack Kemp, cut marginal tax rates across the board for everyone. That created an economic boom that has resulted in the rich paying a higher share of the federal income tax burden, and upper-income workers paying the great majority of it.

Moreover, those marginal rate cuts, plus the Earned Income Tax Credit that began in the 1970s with Ronald Reagan, plus the Child Tax Credit that began with the Heritage Foundation and was enacted into law as part the Contract with America, have produced this result: Reagan and his Republicans have abolished federal income taxes on the working class. Moreover, they have almost abolished federal income taxes on the actual middle class (the middle 20%).

Obama’s Flawed Tax Cut

When Obama and his minions say 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 (those deserving, again, of some serious punishment).

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.

Moreover, this tax cut will do nothing to help the economy, because it does nothing to change marginal tax rates and so does not change the real incentives that drive the economy.
In addition, for almost half of the workers receiving the tax credit, it would involve not a $500 reduction in tax liability (because,as the data above show, so many now pay little or nothing in federal income taxes), but another check from the federal government (because the credit is refundable, it would be paid in full even to people who do not have $500 in federal income tax liability). In these cases, it would not be a tax cut, but just more runaway government spending. Obama cannot cut income taxes for working people and the middle class where Reagan and his Republicans have already eliminated federal income taxes for them. As discussed further below, this tax credit has nothing to do with payroll taxes, despite the misleading rhetoric from the Obama campaign.

McCain has proposed increasing the dependent’s exemption from $3,500 to $7,000. That would cut taxes for middle-class families in the 25% income-tax bracket by $875 per child, and probably eliminate most remaining federal income-tax liability for the middle 20% of income earners. This would not boost the economy either, because it also does not reduce marginal tax rates and so change incentives. But it does promote families’ having more children, which is also good for America in the long run.

But in addition to this middle-class tax cut, McCain also includes other proposals that would reduce marginal tax rates and boost the economy. Besides reducing corporate tax rates, he would make the Bush tax cuts permanent, which would keep income tax rates, capital gains tax rates, and dividend tax rates from rising, and he would still vastly reduce the death tax from its pre-Bush levels. He would also reduce taxes on savings and investment through expensing of capital investment.

McCain also proposes to abolish the Alternative Minimum Tax (AMT), which is currently slated to grow to impose a trillion-dollar increase on the American people in future years, burdening 25 million middle-class families. Abolishing the AMT would save middle-class families $2,700 on average per year, another middle-class tax cut of $60 billion each year from current law.

Obama, by contrast, would combine his $500 tax credit with the above devastating increases in marginal tax rates, and so crush the economy as a result. .Remember also that Bill Clinton campaigned in 1992 on a tax cut for the middle class as well. After he was elected, that was completely forgotten, and Clinton never proposed such a tax cut.

Obama’s New Tax Welfare

Obama has also proposed a series of additional refundable income tax credits for low- and moderate-income workers. As the data discussed above show, these tax credits would go primarily to those who are paying little or no federal income taxes now. Therefore, such credits would primarily not reduce tax liability, but, rather, would primarily 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. That is why I call them The New Tax Welfare.

With these tax credits, Obama’s tax plan is actually 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.

The Obama campaign tries to argue that low- and moderate-income workers still pay payroll taxes, and so the tax credits should be considered as offsetting those taxes. But Obama has not proposed any payroll-tax cuts. He has proposed refundable income tax credits which would not reduce any tax liability for low- and moderate-income workers, the bottom 40% of income earners who do not pay income taxes today. These credits instead would involve new checks sent from the federal government to these workers, which is just new government spending. The argument that the credits offset payroll taxes is just a fairy tale in Obama’s mind. The proposed credits do not involve any changes in payroll taxes at all.

Moreover, the Earned Income Tax Credit was already adopted on the argument that it offsets payroll taxes for low- and moderate-income workers. Single workers earning up to $38,000 in annual income, $40,000 for married couples filing jointly, with two kids are eligible for the credit, as are those earning up to $33,000, $35,000 for married couples filing jointly, with one kid. This credit is now already greater than the payroll tax liability of these workers.

In addition, 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.

Obama’s Fiscal Insanity

The term fiscal insanity has been overused in the past. It should have been reserved up until now for where it really applies: Obama’s tax and spending proposals. Obama’s proposed tax plan overall would not raise nearly enough to finance the more than $1 trillion in increased federal spending he has proposed for his presidential term, if elected. These spending increases include national health insurance and a new global (meaning worldwide) war on poverty, to be financed by American taxpayers.

Moreover, official federal projections show that because of the entitlement programs we already have, federal spending as a percent of GDP will explode in coming years to close to twice current levels, requiring current federal taxes to almost double relative to the economy to finance it. Obama’s answer: Ignore it, and add vast new spending and entitlement burdens on top of it.

Legacy of Saul Alinsky

Because Obama’s tax plan is focused on income redistribution, with economic growth and prosperity be damned, and he envisions an overall explosion of big government, what he is all about can rightly be termed the New Neo-Socialism. That befits a man who began his career carrying on the community-organizing tradition of Socialist revolutionary Saul Alinsky, who worked with the radical left ACORN, who found comfort in the Socialist black liberation theology of the Rev. Jeremiah Wright, who befriended and worked with the quite literally Marxist revolutionary William Ayers, and who was mentored in his youth by the literally Communist journalist Frank Marshall Davis. It all fits together, and helps us to see the big picture.