10 September 2008

Election #1: Enthusiastic Tax-Collector for the Welfare State

The Objectivist
Dunkirk-Fredonia Observer
September 1, 2008

Presidential Candidate Barack Obama is known to be a big-government type, but there is little discussion of just how far left he is. His plans are worth considering because they show that when it comes to taxes, his views are radical and offensive.

It is uncontroversial that Obama and his Vice Presidential Candidate are leftists. In 2007, the National Journal rated Obama as the most liberal member of the Senate and Joe Biden as the third most liberal. When it comes to taxes, in 2007 the National Taxpayer’s Union gave both an F with Obama and Biden, getting scores of 5% and 4% respectively. The average score in this disgraceful Congress was 37%, so these guys really outdid themselves.

Obama plans to wage an all-out war on those who make money and pay taxes. In this country, the rich and upper middle class pay most of the taxes. In 2006, the top 25% of earners (measured by adjusted gross income) paid 86% of the federal income taxes. According to Peter Ferrara of the Institute for Policy Innovation, the bottom 60% paid less than 1% of the federal income taxes and the bottom 40% of earners actually made money (+3.8%) from the federal income tax system because of refundable tax credits. Contrary to conventional wisdom, the middle class also didn’t pull their own weight. The middle 20% of earners paid just 4.4% of these taxes.

The percentage of income paid also increase significantly as income rises. In 2005, according to the Congressional Budget Office, the effective federal tax rates for all types of taxes were as follows: the top 1% paid 31.4% of their income to the federal government, the top 10% paid 27.1%, and the top quintile (that is, top 20%) paid 25.2%. In contrast, the middle quintile paid 14.1%, the second lowest quintile paid just 9.9%, and the lowest quintile paid merely 4.3%. Anyone claiming that the rich don’t pay their fair share is either a liar or doesn’t know the facts.

When one adds the effective tax rates from state and local taxes, it is reasonable to assume that the rich and upper middle class pay at least 40% of their income to various levels of government. Enter Obama. Obama is not content to soak the rich, he wants to assault them. According to R. Glenn Hubbard, the dean of Columbia University Business School, Obama wants a permanent federal estate tax (tax on the assets of the dead) with a top rate of 45%. He wants to raise the income tax on the rich by 14% (from 35% to 40%) and to slam them with an additional payroll tax increase of four percentage points on income above $250,000.

Obama also wants to attack businesses and the stock market. He wants to reverse President Bush’s 2003 tax cuts. He hopes to jack up the rate on capital gains by 25% (15% to 20%) and on dividends by as much as 167% (15% to a top marginal rate of 40%). These taxes are particularly bizarre given that a capital-gains tax cut, that’s right, a cut, will likely increase revenue. On one estimate by Donald Luskin of National Review (using Congressional Budget Office numbers), the Bush capital-gain tax cuts brought in more than $26 billion in additional taxes. Similar effects were observed when President Reagan’s tax cuts increased revenue.

The capital-gains and dividend tax increases are planned, despite the fact that both streams of income have already been taxed by corporate taxes. According to Daniel Mitchell of the Cato Institute, corporate taxes are already sky high relative to the rest of the world. For example, the 2007 federal and state corporate tax rate in the U.S. is around 40%, whereas the European average is 24.2%. When we look at taxes actually paid on capital in 2006, the U.S.’s rate is now the second highest and will soon become the highest. The rate is double some of our competitors. For example, the U.S. rate is 38%, while the rates in Ireland and Hong Kong are 14% and 6.1% respectively. Is there any doubt what will happen to economic growth, income, and jobs when it becomes clear that the United States treats corporations and investors as whipping boys? Nearly half of Americans own stock or stock mutual funds, so this massive increase in taxes will hit the middle class like a hurricane. No doubt about it, under Obama things will change.

Obama has even more tax increases up his sleeve. According to Peter Ferrara, his health-insurance plan includes a new payroll tax on employers, he wants to increase corporate income taxes, and punish oil companies with a new windfall profits tax. Does this make you want to open up your own business or expand your current one? Do you think business owners are stupid?

What does Obama plan to do with the revenue he hopes to raise from this smorgasbord of new taxes? He wants more welfare and more social engineering. As R. Glenn Hubbard and the Wall Street Journal point out, he plans to further the use of the tax code as a welfare disbursement system. In particular, he wants to give tax credits to the poor for their child and dependent care, mortgage interest payments, and to further expand the Earned Income Tax Credit. He also plans to have a taxpayer-funded insurance program similar to Medicare, but available to everyone. He also wants the federal government to become the biggest source of funding for pre-kindergarten education, despite little evidence that it works. His wish list goes on, but you get the idea.

Obama thus presents U.S. citizens with choice. If you vote for him, you are choosing massive tax increases in order to pay for new spending programs for the poor, public schools, and others that are already sucking hard on the government teat.

Strangely, despite his plethora of proposals, Obama is silent on the most pressing issues of the day. One strains to hear of how he plans to handle the oncoming Social Security and Medicare deficits. The former begins to run a deficit in 2017 and along with Medicare they can be expected to produce the ugly choice of significantly ratcheting up taxes on workers or making deep cuts in retirement and medical benefits that the elderly were promised. He is silent on when he would withdraw troops from Iraq. In opposing drilling and preaching independence from oil, his discussion of energy is inappropriate for anyone who went beyond the fifth grade. He is silent on the more than 2.3 million people locked up in prison like animals and the wretched performance of black students in public schools.

If you vote for Obama and you have integrity, you must admit two things. First, he is a hardcore leftist who will try to attack rich and middle class taxpayers in order to increase welfare payments and implement other government programs. Second, he is silent on almost all of the most important issues of that the U.S. faces (entitlement programs, the prison crisis, and the rotten public schools) and nearly silent on another (when we will withdraw from Iraq). Only on amnesty for illegal aliens is his position clear. These admissions make me wonder how we could have gotten to this point.


The Objectivist said...

What Obama and the left should do is cut taxes, but go after corporate welfare, the various programs for middle class and wealthy citizens, and other things that do not serve the poor. If they did this, and emphasized cash payments to the poor, rather than a hodge-podge of poorly organized benefits, they could give the poor significant amounts of cash.

The Objectivist said...

Obama is escaping notice for his hard-left economic policies. How this has not been the focus on the Republicans and the press is beyond me.

It is odd that poorly articulated and vague speeches about the war get center stage, whereas relatively clear and significant taxing and spending policies get ignored.

The Objectivist said...

Far too much attention has been paid to Obama's effects as a unifying force. Aside from the complete lack of evidence for this claim, who cares if it is true. If the price of unity is increasing government control over our economic lives, new taxes, and continued poor performance by the stock market, disunity sounds like the better deal.