Obama's New Tax Welfare

Barack Obama’s supposed tax cut for 95% of American workers is meant to draw attention from the real core of the Obama tax plan – proposed increases in every major federal tax:

--Obama proposes to raise the top two individual income tax rates by 25% or more, both through explicit rate increases, and the phaseout of personal exemptions and all itemized deductions for these upper income earners;

--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, estimated at around 7%;

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

--Even though American companies already face the second highest marginal tax rates in the industrialized world, Obama’s tax plan provides for increasing the corporate tax burden by another 25%, “by closing corporate loopholes and tax havens”;

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

It’s the Incentives, Stupid

Obama argues that only higher income workers and rich corporations will suffer these tax increases, and they can afford it. But tax and economic policy is not about who “can afford it”, an uninformed and socially retrograde sentiment. It is precisely 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. With higher marginal tax rates, the reward for these pro-growth economic activities is reduced, and so these activities decline.

These incentives affect not just higher income people, and all the resources they control, and corporate employers and all their capital, and small businesses who would suffer the individual income tax rate increases. They also affect everyone who plans to be in these upper income precincts someday, or who strives to get there, or who may be trying to gain capital investment from people with money for their own small business, like Joe the Plumber, or who is looking to get a job, which usually only comes from business people with money. Through the effect of these incentives throughout the economy, everyone will be harmed by Obama’s tax increases.

Ireland adopted a 12.5% corporate tax rate 20 years ago, when it suffered the second lowest per capita GDP in the European Union (EU). Its economy boomed as a result, and today Ireland enjoys the second highest per capita GDP in the EU. This is the effect on the middle class and working people of sound tax policy and the resulting incentives. Ireland with its 12.5% rate raises 50% more corporate tax revenue as a percent of GDP than the U.S. does with its 35% federal corporate tax rate.

Yet Barack Obama laughs at McCain’s proposal to reduce that corporate rate to 25%, the minimum needed to restore international competitiveness for U.S. companies and employers, mocking it as still more tax cuts for rich corporate fat cats. The EU as a whole has reduced its corporate tax rate in the last 10 years from 38% to 24% on average. Canada has just adopted a 19.5% rate, with a 15% rate phasing in. Germany has also recently adopted a19% corporate rate. How are American companies supposed to provide good jobs at high wages with this crippling tax disadvantage? Unfortunately, Obama remains hopelessly mired in his prep school Marxism, which was not remedied by his Ivy League miseducation.

Obama’s tax plan is exactly the opposite of the supply side economics that Reagan adopted, which produced the astounding boom of the 1980s. That boom, in fact, lasted 25 years, from 1982 to 2007, as Art Laffer and Steve Moore discuss in their new book The End of Prosperity. Laffer and Moore explain that more wealth was produced during those 25 years than in the previous 200 years of American history.

Obama’s tax plan is also exactly the opposite of President Kennedy’s tax policies, which produced another astounding boom in the 1960s. Pursuing the exact opposite policies from Kennedy and Reagan will produce exactly the opposite results.

Note also that Obama’s tax increases will not produce nearly enough revenue to finance all his lavish spending proposals, as shown in particular by a brilliant new paper from Alan Reynolds of the Cato Institute. Do you think that after all those years of swimming in a sea of left wing extremism with Bill Ayers and Jeremiah Wright and ACORN and the Saul Alinsky folks, that when he finally gets to the White House he is going to give up on his Big Government neo-socialism? Or is he going to start imposing huge tax increases on more and more people?

Bill Clinton campaigned in 1992 promising a tax cut for the middle class. But after he was elected he quickly dropped that idea, and adopted tax increases for people making as little as $20,000 per year. What happened to fool me once shame on you, fool me twice shame on me?

Obama’s Tax Cut

But Obama has the country mesmerized again in PT Barnum Act II with his supposed tax cut for 95% of Americans. Notice how no one ever asks the Messiah exactly what tax cut is he talking about? Indeed, the last person to ask Obama the Munificent a tax question was Joe the Plumber, and we all know what happened to him. The New York Times ran his tax returns on the front page.

Obama’s tax plan specifies that this tax cut is a $500 per worker income tax credit for workers making up to $75,000 per year, and for families making up to $150,000. I dispute that this would cover 95% of all Americans, but there are more important points.

Such a tax credit is a simple giveaway, like George McGovern’s 1972 promise of a $1,000 check for everyone, which the American people then rejected as a crass vote-buying scheme. It does nothing to improve the economy because it does nothing to change marginal tax rates or incentives. Indeed, it would hurt the economy on net because the credit will be phased out at higher income levels, which would effectively raise marginal tax rates again at those higher incomes. (As you earn more, you suffer a penalty in the phase out of the credit, which has the exact same effect on incentives as a tax rate increase).

In addition, McCain has actually proposed a hefty agenda of tax cuts for the middle class, far more substantial than a $500 per worker tax credit. McCain has proposed to increase 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. 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.

McCain also proposes a tax credit of $5,000 per family and $2,500 per single worker for purchasing health insurance. This is a huge tax cut for the middle class, $1.3 trillion over 10 years. As Scott Hodge of the Tax Foundation says, “This tax provision has a bigger impact on cutting people’s taxes than any single proposal from either party.”

McCain proposes as well to eliminate a huge pending tax increase for the middle class under current law by abolishing the Alternative Minimum Tax (AMT). The AMT is 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 a pending tax increase of $2,700 on average per year, another middle class tax cut of $60 billion each year from current law.

Most importantly of all, McCain’s tax plan also includes pro-growth tax cuts that provide exactly the shot in the arm the economy needs right now, exactly the opposite of Obama’s tax plan. The reduction in the federal corporate tax rate from 35% to 25% is a marginal tax rate reduction which would probably not lose any significant revenue overall on net because American companies are so stymied now by the uncompetitive 35% rate. McCain would also 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. Abolishing the AMT is another pro-growth tax cut that would prevent additional marginal tax rate increases.

These pro-growth tax cuts would do far more for the middle class and working people than a $500 per worker tax credit. They would reverse the current economic downturn, restoring economic growth, creating jobs, and reviving income and wage growth. They would “spread the wealth around” by creating prosperity for working people and the middle class, not by stealing from those who have already produced their own wealth.

Obama’s New Tax Welfare

The top 1% of income earners now pay 40% of all federal income taxes, almost twice their share of national income. The top 20% pay 86%. Clearly, federal income taxes are now paid primarily by these upper income taxpayers.

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 4.7% of all federal income taxes.

This is the result of Reagan Republican supply side economics that began with Reagan and Jack Kemp in the 1970s and 1980s, through Newt Gingrich and his Contract with America, to the Bush tax cuts of 2001 and 2003. 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%). Indeed, the tax cuts proposed by McCain would probably eliminate most of the remaining tax liability of the middle class.

When Obama insists that he wants all of his tax increases for upper income workers because of fairness, he is reflecting the ignorance of his own left wing extremism, and of the left wing nutcase base to which he is appealing. If the top 1% is already paying 40% of federal income taxes, and the top 20% are already paying almost of all of them, how is increasing their tax burdens further promoting fairness?

Moreover, Obama cannot cut federal income taxes for working people and the middle class where Reagan and his Republicans have already eliminated federal income taxes for them.

Nevertheless, besides his $500 per worker tax credit, Obama proposes a slew of additional refundable income tax credits targeted towards low and moderate income people, precisely those who pay little or no federal income taxes now. The term “refundable” means that if the worker does not have enough tax liability to take advantage of the credit, the government sends the worker a check to cover the full amount of the credit anyway. Obama proposes such tax credits for child care, education, housing, retirement, health care, welfare, and other giveaways.

Such credits would primarily not reduce tax liability, but, rather, would primarily involve checks from the federal government for these purposes. Consequently, they are not tax cuts. They are new federal spending programs hidden in the tax code. This is why I call it The New Tax Welfare. These new tax welfare programs alone would cost an additional $1.3 trillion over 10 years.

The Obama campaign is dishonest when it says these credits somehow offset payroll taxes. None of these credits, including the $500 per worker credit, involve any reduction in payroll taxes. They are refundable income tax credits, not payroll tax cuts. If Obama wants to reduce payroll taxes, let him propose an actual payroll tax cut, and then explain to the country how we are going to finance Social Security benefits.

Such cash grant tax credits again would do nothing to help the economy. Indeed, they would hurt the economy because the credits are again phased out as income grows into and beyond the middle class, actually effectively raising marginal tax rates for these middle class and upper middle class taxpayers.

The Obama tax plan is consequently precisely the opposite of tax reform. Instead of closing loopholes and lowering rates, he is creating new loopholes and raising the rates. Raising the top marginal tax rates for every major federal tax, and adopting $1.3 trillion in new tax welfare tax credits, could not be dumber, more counterproductive, anti-growth tax policy. This is not going to benefit 95% of Americans. It is going to leave all Americans poorer and worse off.