What Change Will Obama Make?

Tax Policy

There are fundamental differences between the Obama and McCain tax policies. This analysis will focus on two.

(1) Income taxes: The Obama plan is a redistributionist plan designed to shift the tax burden even more heavily on the backs of the income generators while using the additional revenue gathered to lower rates for, and buy off, those in the lower income tax brackets. The top two tax rates would revert to the pre-Bush levels of 36% and 39.6%, from their current 33% and 35%.

Cutting through the Democrat Party rhetoric, it must be emphasized that the so-called “rich” already pay the bulk of the taxes in this country, a burden far beyond their proportion of the population. The latest data from the Internal Revenue Service indicates that the top 1% earn 19% of the income, but pay 37% of the taxes. The top 5% earn 33% of the income and pay 57% of the taxes. The top 10% earn 44% of the income and pay 67% of the taxes. Conversely, the bottom 50% (those below the median income level) earn 13% of the income and pay only 3% of the taxes. The above calculations do not include Social Security or Medicare.

Democrats have milked the refrain of making the rich pay their “fair share” so long it makes you want to vomit. They never really define what the “fair share” is, but you can be guaranteed that it’s always more than what they are currently paying. Otherwise, they would have no issue at the next election cycle. This continual jiggering of income tax rates is, as Milton Friedman used to say, the politicians’ re-election program. That's why so many fear such reforms as a permanent flat tax, or fair tax. Such reforms would provide an incalculably positive benefit to the American economy, not only by spurring economic growth, but by drastically reducing the enormous costs of tax compliance, estimated to total more than $600 billion annually. And we would have the additional positive benefit of adding to the unemployment rolls thousands of Washington lobbyists, many of whom are dedicated to gaining some benefit or forbearance from the federal tax code.

Obama would raise the top marginal rate from 35% to 39.6% for those families making more than $250,000 per year ($200,000 for individuals). But he would also remove the cap on Social Security taxes for those earning more than $250,000. For the self-employed who pay both the employee and employer shares of the tax, this would amount to an additional 12.4%, pushing their effective tax rate to more than 50% for all marginal income above the $250,000 level. This change would also transform Social Security from a form of social insurance, with defined contributions and benefits, into a welfare program. Add in state and local taxes and you have a total tax burden of at least 60%, comparable to that of the most advanced socialist welfare economies in the world.

Ironically, when Ronald Reagan lowered the top marginal rate from 70% to 28% in the early 1980s, economic growth increased, people were encouraged to realize more taxable income, and the share of total income taxes paid by the wealthiest 1% of taxpayers rose from 18% to 27%. In the name of “fairness,” Obama would reverse course and cause a drastic reduction in total revenues by punishing the rich. He has learned nothing from history.

What the American people have to ask themselves is: would you rather have more income tax revenues at lower tax rates to spend on government programs, or the lower revenues which will result by raising the rates on those families making more than $250,000 per year. One approach achieves results, the other sacrifices revenue gains for the illusion of fairness. One is grounded in the fundamental principles of economic liberty, the other in the failed ideology of Marxism.

Revealingly, James Pethokoukis, writing in U.S. News and World Report, took a poll of delegates to the Democratic National Convention in Denver. His survey revealed that the vast majority of delegates do not share Obama’s taste for higher marginal tax rates. In fact, they don’t even know what the current tax rates are. The poll of 24 delegates revealed that 50% of them thought the rich should pay 25% in taxes, while 25% thought they pay should 20%. Only 12% said 35%, the current rate. Another 12% said 30%. The average response of 25.6% was about 10% less than the current highest marginal rate of 35%. The results highlight the level of elitism and ideological extremism was captured the leadership of the Democratic Party.

Lest you think that Pethokoukis’s findings are a statistical anomaly, consider the results of a June, 2008 Gallup poll:

When given a choice about how government should address the numerous economic difficulties facing today's consumer, Americans overwhelmingly -- by 84% to 13% -- prefer that the government focus on improving overall economic conditions and the jobs situation in the United States as opposed to taking steps to distribute wealth more evenly among Americans.

Americans' lack of support for redistributing wealth to fix the economy spans political parties: Republicans (by 90% to 9%) prefer that the government focus on improving the economy, as do independents (by 85% to 13%) and Democrats (by 77% to 19%). This sentiment also extends across income groups: upper-income Americans prefer that the government focus on improving the economy and jobs by 88% to 10%, concurring with middle-income (83% to 16%) and lower-income (78% to 17%) Americans.

These results confirm that Barack Obama and the far-left ideologues in charge of the Democratic Party are seriously out of touch, not only with the American people generally, but with the members of his own party.

John McCain’s tax proposal would maintain the current reductions in the marginal tax rates from 39.6 percent to 35 percent, 36 percent to 33 percent, 31 percent to 28 percent, and 28 percent to 25 percent, and retain the 10 percent tax bracket. He would also increase the dependent child tax credit from $3,500 to $7,000 between 2010 and 2016 and double the personal exemption for dependents from the current $3,500 to $7,000. There will be no increased Social Security taxes placed on upper income taxpayers.

Barack Obama’s tax proposals are not only dangerous, but woefully ignorant. They are based on fundamentally flawed economic assumptions about the ability of higher taxes to generate additional revenues. They are based on a Marxist hostility to wealth and a willingness to sacrifice revenues for the sake of the illusion of “fairness.”

Fifteen years ago, San Francisco investment economist and Hoover institution president W. Kurt Hauser published a remarkable study which demonstrated that, regardless of tax rates, tax revenues in the post-WWII era have remained at about 19.5% of GDP. Hauser demonstrated that the federal tax yield held steady at about 19.5% whether the highest marginal rate was 91% (as it was prior to the Kennedy tax cuts) or 35%, (as it is today) and that tax revenue is directly proportional to GDP. His conclusion: if you want to increase tax revenues, you need to increase GDP.

Hauser also points out that economists of all stripes accept the view that a tax rate increase would have a negative impact on tax revenues. He discovered that rising tax rates encourage taxpayers to “shift, hide, and underreport income,” while “higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation.” David Ranson concludes that “capital migrates away from regimes in which it is treated harshly and toward regimes in which it is free to be invested profitably and safely,” and “the economics of taxation will be moribund until economics accept and explain Hauser’s law.” Hauser’s findings expose the economic ignorance of Barack Obama.

(2) Capital gains taxes: Capital gains under the McCain plan would remain at the 0% and 15% levels, depending on income. As a short-term economic stimulus, however, the 15% rate would be halved for two years.

Under Obama, capital gains would be increased from the current rate of 15% to 28%.

How would these respective plans play out in practice? Recent history provides little support for the revenue-enhancing benefits of an increase in capital gains rates. Indeed, when Congressional Republicans and President Clinton united to reduce the rate from 28% to 20% in 1997, revenues increased. And when the rate was increased from 20% to 28% in 1986, revenues fell sharply. Moreover, the rush to realize capital gains prior to the 1986 increase, caused revenues to dropped precipitously. Four years later, in 1990, the federal government was still taking in 13% less revenue at the 28% rate than it did in 1985 at the 20% rate. Despite this hard evidence, Obama persists in wanting to raise the capital gains rates out of a sense of “fairness.”

When Republicans cut the rate to 15% in 2003, they were the brunt of a lot of criticism from Democrats and leftwing pundits who said it would reduce revenues. What followed, however, was an enormous "unlocking" effect, as investors sold more stock and assets to take advantage of the lower rate. Capital gains realizations soared to over $729 billion in 2006 from $269 billion in 2002. This increased Treasury receipts from capital gains to roughly $110 billion in 2006 from $49 billion in 2002.

As part of his "Tax Fairness for the Middle Class" plan, Obama is in favor of nearly doubling the capital-gains tax rate from 15 percent to 28 percent. The increased revenue would be used to fund a variety of new proposals, including new healthcare, education, and infrastructure spending, and totaling over $800 billion. However, a review of changing capital gains rates and resulting revenues over the past fifty years indicates that higher capital gains rates will likely be a net revenue loser for the federal treasury, forcing tax increases elsewhere to pay for spending.

When pressed by CNBC’s Maria Bartiromo on the issue of capital gains rates, Obama replied: "When I talk to people like Warren Buffett or others and I ask them, you know, what's – how much of a difference is it going to be if it's 20 or 25%, they say, look, if it's within that range then it's not going to distort, I think, economic decision making.” Obama concluded that a higher rate would boost federal receipts, which would allow the government to redistribute "relief to middle class and working class families.”

Someone failed to warn Mr. Obama to avoid making national economic policy by anecdote. Warren Buffett is not an economist, nor even a money manager, but the CEO of a very successful insurance company which owns a few stocks. In the past 35 years, he has no calculated record as a portfolio manager, and the reputation he does have rests almost entirely on the performance of Berkshire Hathaway stock, whose price is driven largely by the performance of his insurance company. On the issue of capital gains rates, it’s sort of like the blind leading the blind.

As for Mr. Obama's implication that capital gains remain the privilege of the wealthy consider that, in recent decades, the U.S. has become a shareholder society, and that average Americans increasingly rely on investment income to save for retirement or pay current expenses.

In 2005, according to the most recent data from the Internal Revenue Service, 8.5 million households paid taxes on capital gains. Of these, a sizeable 47% of those filers reported income of less than $50,000, while 79% had income under $100,000. Voters must bear in mind that capital gains themselves count as income, and are often a one-time windfall, resulting from the sale of a small business or long-held stock. These working families would take a double hit, both with a higher tax rate and lower stock prices, because financial markets translate higher taxes on stock profits into lower stock valuations.

Not surprisingly, under the McCain tax plan, the economy would be expected to be about $320 billion larger, and average household income about $2,600 higher than would be the case under the Obama tax plan. And job growth under Senator McCain's plan would be more than two times faster than job growth under Senator Obama's plan. In collaboration with the Heritage Foundation, economists from the Center for Data Analysis of Lexington, Massachusetts used a version of the Global Insight (GI) baseline forecast and the U.S. Macroeconomic Model to simulate the economic effects of adopting the McCain and Obama tax proposals. They projected a net gain of 2,125,000 jobs under the McCain plan as opposed to 915,000 jobs under the Obama plan, a net difference of 1,210,000 jobs. The outcomes include the effects of these proposed policies on gross domestic product, disposable income, and employment growth over a 10-year period.

Conclusion

A comparison of the candidates' respective economic plans reveals that, despite some similarities, they are separated by a sharp philosophical divide. One candidate is fully cognizant that America’s exceptionalism and prosperity are the result of our God-given rights, including economic liberty, the free market, property rights, the rule of law; and that our religious faith and freedom are the glue that binds us together as a nation. The other believes that our rights are derived from government, and that government has the right, and obligation, to dispense the fruits of our labors as it sees fit, to take from one group and dispense to another which has not earned it. This philosophy does a grave injustice both to those from whom property is taken and to those to whom it is given.

Not surprisingly, Barack Obama’s supporters include many who reject free market capitalism, private property, and who advocate some form of socialist or quasi-Marxist form of government. Is it surprising that Barack Obama is supported by the likes of Fidel Castro, Daniel Ortega, and Hugo Chavez?

John McCain’s economic program provides tax relief to taxpayers at all income levels and rejects the socialist dogma that one class of people must bear an even higher burden of taxation to satisfy the envy of others, or, more importantly, the needs of politicians to buy the votes of those who will keep them office.

There is a reason why the vast majority of Americans do not buy into the radical creed of income redistribution. It is because they believe in limits upon government intrusion into our lives, whether economic or political. It is that they realize, as Gerald Ford observed, that "a government big enough to give you everything you want is a government big enough to take from you everything you have," and they refuse to yield up to government that kind of power, no matter how benign the motives. And they also inherently realize that the more government tries to do, the more the people collectively withdraw into complacency and sloth. Indeed, there is no way in which government can overcome the collective diminution of effort that results when a populace is enfeebled by ready access to government benefits to which they think they are entitled. It is a self-defeating proposition, and one whose lessons we learn only through the heartache and misery of ruined lives, as the lessons of the Great Society so amply demonstrate.

Barack Obama poses a grave threat to our American way of life and economy because his candidacy represents a philosophy, and a group of special interests, which have never really understood the reasons for our success as a nation, or learned from our past mistakes. His entire career, from his youth in Hawaii under the guidance of communist mentor Frank Marshall Davis to his days as a community organizer and trainer with ACORN, has reflected a radical mindset whose solution to society’s ills is to ask little or nothing of his clients and everything of government. His is the naiveté of youth, still untempered by the wisdom which should be derived from experience. His mantra of “Change” rings hollow when it is accompanied by political complacency and accommodation in the face of both private and public corruption. How can we expect “Change“ in America when this man could not even confront the obvious evils in his own city and neighborhood. We hardly know this man, but what we do know should give us cause to rise up and stop his candidacy in its tracks.

More about the economic issue:

People, overwhelmingly don't want disributed wealth.
McCain ad with Joe the Plumber.
Discussion about Obama's economic plan.