If he is elected, Senator Barack Obama wants to be the Tooth Fairy. Going to all the houses of the people who don’t pay taxes to leave money under their pillows. The problem is, there is no real tooth fairy. It doesn’t work. As “tooth fairy” Obama first wants to take the money from under the tax payers pillows. Especially those tax payers that create Jobs and keep the economy running. Beyond what Obama will do to OUR pockets is the fact that he will suppress tax revenue because of the slower economy, increasing the deficit.
Obama’s New Tax Welfare
Behind the 95.
By Peter Ferrara
The first point requires but a simple list. Obama proposes to raise the top two individual income tax rates by 25 percent or more, through both explicit rate increases and the phaseout of personal exemptions and all itemized deductions for upper-income earners. He’ll increase the capital-gains tax rate by 33 percent, the tax rate on dividends by 33 percent, and the top payroll-tax rate by 16 to 32 percent. He’ll create a new payroll tax for national health insurance, estimated at 7 percent. He’ll reinstate the death/inheritance tax, which is being phased out under current law, with a new top marginal rate of 45 percent. He’ll increase the corporate tax burden by 25 percent “by closing corporate loopholes and tax havens.” He’ll even increase tariffs through his protectionist trade policies.
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.” Increasing these marginal tax rates greatly harms the economy — when more of the money earned goes to the government, there’s less incentive for “the rich” to work, save, invest, and create and expand businesses. This affects people trying to start businesses with investment money from wealthy folks. Not to mention people looking for jobs, which usually come from businesspeople with money.
This isn’t just a theory. Ireland adopted a 12.5 percent 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. Ireland, with its 12.5-percent rate, raises 50 percent more corporate-tax revenue as a percent of GDP than the U.S. does with its 35 percent rate. Yet Barack Obama laughs at McCain’s proposal to reduce that corporate rate to 25 percent, 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.
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, 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 by a brilliant new paper from Alan Reynolds of the Cato Institute. And by the way, Bill Clinton campaigned in 1992 promising a tax cut for the middle class — after he was elected he dropped that idea, adopting tax increases for people making as little as $20,000 per year.)
Finally, Obama’s “tax cut,” if he follows through with it, will often be a simple giveaway. As it stand right now, roughly one-third of income earners pay no federal income taxes. Many actually receive payments from the income-tax system — these payments total 3.8 percent of all federal taxes paid. Simple arithmetic holds that if one-third of earners don’t pay income tax, it’s impossible to cut taxes for 95 percent of earners.
Obama’s “tax cut” is, in reality, a $500-per-worker refundable income-tax credit for workers making up to $75,000 per year, and for families making up to $150,000. 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. It is like George McGovern’s 1972 promise of a $1,000 check for everyone, which the American people rejected as a crass vote-buying scheme.
Besides the $500-per-worker credit, Obama proposes a slew of income-tax credits targeted toward low- and moderate-income people, also refundable. Obama proposes such tax credits for child care, education, housing, retirement, health care, welfare, etc.
Though the people receiving these credits will spend the money, the programs will probably hurt the economy on net, because the credits will be phased out at higher income levels. This, in effect, constitutes yet another marginal tax on high-income earners, and thus another blow to their incentives to be productive.
These programs alone would cost $1.3 trillion over ten years. I call it The New Tax Welfare.
— Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation, and general counsel of the American Civil Rights Union. He formerly served in President Reagan’s White Office of Policy Development, and as associate deputy attorney general of the United States under the first President Bush.