The Candidates And Taxes

One of the biggest -- if not the biggest -- issue in the upcoming election is the economy, and one of the biggest factors in overall economic health is taxation.  I've been asked by a couple people to post about the candidates' positions on taxation, so I wanted to pass along some of those details.

I've often blogged about how the Obamessiah would raise taxes on everything he could get away with, especially if the Democrat party gains a significant majority in Congress.  I want to first look at an op-ed in the Wall Street Journal from a couple weeks ago (excerpts):

What if I told you that a prominent global political figure in recent months has proposed: abrogating key features of his government's contracts with energy companies; unilaterally renegotiating his country's international economic treaties; dramatically raising marginal tax rates on the "rich" to levels not seen in his country in three decades (which would make them among the highest in the world); and changing his country's social insurance system into explicit welfare by severing the link between taxes and benefits?

The first name that came to mind would probably not be Barack Obama, possibly our nation's next president. Yet despite his obvious general intelligence, and uplifting and motivational eloquence, Sen. Obama reveals this startling economic illiteracy in his policy proposals and economic pronouncements. From the property rights and rule of (contract) law foundations of a successful market economy to the specifics of tax, spending, energy, regulatory and trade policy, if the proposals espoused by candidate Obama ever became law, the American economy would suffer a serious setback.

First, taxes. The table [below] demonstrates what could happen to marginal tax rates in an Obama administration. Mr. Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003, and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102,000 of earnings. The result is a remarkable reduction in work incentives for our most economically productive citizens.

The top 35% marginal income tax rate rises to 39.6%; adding the state income tax, the Medicare tax, the effect of the deduction phase-out and Mr. Obama's new Social Security tax (of up to 12.4%) increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.8%. People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.2 cents -- a reduction of one-third in the after-tax wage!

Despite the rhetoric, that's not just on "rich" individuals. It's also on a lot of small businesses and two-earner middle-aged middle-class couples in their peak earnings years in high cost-of-living areas. (His large increase in energy taxes, not documented here, would disproportionately harm low-income Americans. And, while he says he will not raise taxes on the middle class, he'll need many more tax hikes to pay for his big increase in spending.)

On dividends the story is about as bad, with rates rising from 50.4% to 65.6%, and after-tax returns falling over 30%. Even a small response of work and investment to these lower returns means such tax rates, sooner or later, would seriously damage the economy.

On economic policy, the president proposes and Congress disposes, so presidents often wind up getting the favorite policy of powerful senators or congressmen. Thus, while Mr. Obama also proposes an alternative minimum tax (AMT) patch, he could instead wind up with the permanent abolition plan for the AMT proposed by the Ways and Means Committee Chairman Charlie Rangel (D., N.Y.) -- a 4.6% additional hike in the marginal rate with no
deductibility of state income taxes. Marginal tax rates would then approach 70%, levels not seen since the 1970s and among the highest in the world. The after-tax return to work -- the take-home wage for more time or effort -- would be cut by more than 40%.

History teaches us that high taxes and protectionism are not conducive to a thriving economy, the extreme case being the higher taxes and tariffs that deepened the Great Depression. While such a policy mix would be a real change, as philosophers remind us, change is not always progress.

For brevity's sake, I cut out a chunk of the article that talks about how Obama has shown a trend toward limiting free trade (like NAFTA) with friendly nations.  Bottom line: Obama doesn't have enough economic understanding to run a lemonade stand, much less the largest economy in the world!

With that as his starting point, here's a more recent update.  As he begins to transition into the general election audience rather than just his far Left, affluent/guilt-ridden, poor/dependent base (remember, the majority of the Democrat constituency is both the very wealthy and the very unwealthy, and little of the middle class in between), Obama is moving toward the center, as most politicians do.

This is a pretty big change for Obamanomics. Economic advisers Austan Goolsbee and Jason Furman, in today's Wall Street Journal, now say that Barack Obama's tax plan will do the following:

1) It will increase capital gains and dividend tax rates, to 20 percent, only for families making over $250,000. Before, Obama was hinting at rates as high as 28 percent for everyone.

2) On the issue of the Social Security income cap, he's now considering a plan that would make folks earning over $250,000 pay in the range of 2 to 4 percentage points more in total (combined employer and employee) payroll taxes. Previously, there were hints at increases of from 6 percent to 12 percentage points.

James Pethokoukis makes some observations about the shift:

1) It's smart politics. Previously, McCain could say the Obama plan would raise taxes on everyone who had an investment. Now the tax issue is more purely one of class warfare, where McCain has to defend not raising taxes on wealthier Americans despite a projected budget deficit of almost $500 billion. It's tougher to make the claim that Obama would raise taxes more than he is telling.

2) It's dumb politics because it opens Obama to the flip-flopper charge—he is only changing his plan because the polls are close and the issue was hurting him.

3) McCain will have to do a better job in telling folks why cutting corporate taxes is a direct benefit for workers and highlight the risk of raising taxes in a weak economy.

4) Goolsbee and Furman also trot out the "return-to-Clintonomics" line of defense:

Even as Barack Obama proposes fiscally responsible tax reform to strengthen our economy and restore the balance that has been lost in recent years, we hear the familiar protests and distortions from the guardians of the broken status quo. Many of these very same critics made many of these same overheated predictions in previous elections. They said President Clinton's 1993 deficit-reduction plan would wreck the economy. Eight years and 23 million new jobs later, the economy proved them wrong. Now they are making the same claims about Sen. Obama's tax plan, which has even lower taxes than prevailed in the 1990s—including lower taxes on middle-class families, lower taxes for capital gains, and lower taxes for dividends.

Look, it is not just the level of tax rates, it's the direction. Second, the Clinton tax hikes happened after the economy had built up a tremendous head of steam. When Clinton signed his big tax increase bill in August 1993, the economy had been expanding for nine consecutive quarters—more than two years—and was able to power through the negative economic impact of the hikes.

In 2009, the United States might be just emerging from a nasty downturn, only to get hit by a tax increase. Also, recent research shows that tax hikes may be less harmful if accompanied by spending cuts. Yet Obama is planning huge and specific spending increases matched by often vague spending reductions. Clintonomics was all about balancing the budget. This is not a priority for Obama.

5) McCain might want to consider tax relief that directly targets families, such as a massive increase in the child tax credit. I have raised this issue in chats with McCain advisers, but they haven't seemed too interested in going beyond what McCain's already proposed, doubling the dependent exemption.

So, now you know his starting point and current position.  While there's no doubt that his policy proposals will continue to shift as we draw closer to November, the constant threads we have seen are that he intends to raise taxes on millions of Americans.  While he says he won't hit working class Americans, he conveniently leaves out the fact that many, many small businesses are run by working class Americans, and that business income is more than enough to be considered 'rich'.  Since small business is the core and majority of the workforce of America -- meaning that just about everyone either works for or does personal business with them in some way -- this will affect just about everyone, either directly or indirectly.  McCain needs to be able to explain these small but critical components of Obama's proposals, or Obama will kill him with talk of 'taxing only the rich'.

John McCain, by contrast, has a hard lean toward the side of lower taxes and spending restraint across the board.  Here's an older article talking about his positions (I haven't really seen anything significantly different in recent weeks):

McCain said he will maintain the low income and investment tax rates put in place by President Bush. He singled out the need to keep the capital-gains tax rate at a low 15 percent, so that businesses will have the investment necessary to expand jobs, productivity, and real wages.

Completely unlike Obama, McCain is saying you can't have capitalism without capital. And he recognizes that investors must have high after-tax returns in order to take risks and fuel entrepreneurial activity. On this point, think high-risk energy technologies for clean coal, natural gas, oil shale, and nuclear and cellulosic power.

McCain repeated his plan to reduce the corporate tax rate to 25 percent from 35 percent. This could be his single-most-important tax reform. Not only will it enhance America's global competitiveness, since we have the second highest corporate tax among large countries. But a number of studies show that roughly 70 percent of the benefits from a lower corporate tax will flow to the workforce in the form of higher real wages and more jobs.

McCain also pledged to keep the estate tax low to reward family businesses. Overall, he would seek a flatter and simpler tax system, probably modeled on Rep. Paul Ryan's idea of two rates of 25 and 15 percent. McCain also discussed several middle-class tax cuts, such as doubling the child tax exemption and phasing out the alternative minimum tax. For businesses, McCain added a first-year cash-expensing provision for the write-off of new equipment and technology.

McCain coupled all this with a pledge to veto earmarks and pork-barrel spending.

It never ceases to amaze me that it has been proven time and time again that raising taxes causes an economic slowdown, and that lowering taxes causes an economic stimulation.  And yet, Democrats almost invariably pledge to raise taxes on everything whenever possible!

The difference on this most critical issue couldn't be bigger, and McCain needs to emphasize it.  Given the energy crunch right now, if he situates his energy proposals inside an overall economic package that is individual- and small-business-friendly, he will have a real chance to beat the Obamessiah in November.

If you're a long-time reader of this blog, you know that I'm no fan of John McCain.  However, I heartily believe that we simply cannot afford a Barack Obama presidency.  If his naivete and incompetence doesn't destroy our economy, his proposals certainly will.

There's my two cents.