The Objectivist
THE MASSIVE BAILOUT: BAD, BAD, BAD
Dunkirk-Fredonia Observer
October 4, 2008
On Friday, October 3, 2008, the U.S. passed the Emergency Economic Stabilization Act of 2008. This $700 billion bailout authorizes the Secretary of the Treasury to spend up this amount to purchase mortgage-based securities from U.S. banks. This is an attempt to reduce the banks’ losses. According to the plan, the U.S. government will buy the securities and in return receive the mortgage payments and eventually be able to sell the securities. The maximum cost of the plan is roughly $4,635 per income-tax paying citizen ($700 billion divided by 151 million working Americans), although this figure assumes that the purchased real estate will eventually have no value and it won’t. The Bush administration convinced Congress that the plan will keep the credit market healthy and thereby ensure that consumers and businesses can continue to get credit. If the plan wasn’t enacted, the Bush administration argued, the loans would dry up and the economy would collapse.
The problem here is that housing prices are declining after being grossly inflated. As a result, people are not making their housing payments. There is also widespread uncertainty about how high many defaults and foreclosures will go. A foreclosure occurs when the lender takes over the house that was used as collateral for the loan.
In the long term, this plan will hurt the economy. First, we don’t need the plan because we are not heading over the financial cliff. Alan Reynolds of the Cato Institute points out that the U.S. economy is still growing (the real gross domestic product is up). It should be noted that there are some warning signs. The gross domestic products of France, Germany, Japan, and Hong Kong are declining. More ominously, the Dow Jones Industrial Average did drop 31% as of this past Tuesday (10/14/08). Still, this is nothing like the almost 90% drop in stock prices that occurred in July 1932. It is also worth noting that there have been 10 previous drops in the stock market (defined as at least a 20% decline in the Standard & Poor 500). Columnist Robert Samuelson points out that this includes nearly 50% drops in 1973-1974 and 2000-2002.
Reynolds also points out that bank and consumer loans are up. In fact, consumer loans are growing at the fastest rate since 2004. That is not a typo. Consumer and industrial loans are up. While giant banks have cut back on their loans, smaller banks have stepped into the breach. Reynolds points out that even loans between banks, a major concern for the bailout proponents, have only dipped modestly and in any case are very small in comparison to consumer and business loans. Even the interest rate on these loans as recently as September 30, 2008 was not out of the range of such loans in the last year.
The concern over bank failures is also premature. As of less than a week ago (September 29, 2008), there were little more than a dozen bank failures compared to more than 5,000 in the 1930s (The Great Depression) and 3,000 in the 1980s (The Savings & Loan Crisis). Where several major financial institutions have failed (Washington Mutual, Wachovia, Bear-Stearns, Lehman Brothers, and AIG), the Federal Reserve and Federal Deposit Insurance Corporation have handled the situation. The recent drop in the Dow Jones Industrial Average is distinct from bank failures.
Second, the taxpayer money that is to be used to purchase the housing loans (that is, mortgage-based securities) must come from higher taxes or loans. Because the market almost always puts the money to better use than the government, higher taxes will result in U.S. dollars being put in to less efficient use. This problem will intensify once politicians start to trade security purchases for campaign contributions and other benefits. This in turn will reduce economic growth rates. Daniel Mitchell points out that lowered growth rates have significant effects over the long term because of compounding. The slightly higher growth rates in the U.S. as compared to our competitors explain why U.S. citizens make more money than French, German, and Japanese citizens. If the money is used for loans, then the government is taking out one loan to pay off another. Again this directs resources to less efficient uses and ratchets up the debt. Skyrocketing debt is in fact one of the legacies of the Bush administration. Joseph Stiglitz, a Nobel Prize winning economist, points out that in the last eight years the debt has increased by 58% (32% when you adjust for inflation) and by an astounding $3.3 trillion. In 2008 and 2009, the deficit will likely reach record heights.
Third, the plan’s particulars are atrocious. The government will need to decide what to pay for the mortgage-backed securities. Stiglitz points out that the banks will likely get the government to pay way too much for the worst mortgages. If the government paid fair market value for these terrible loans, then the banks would still have a crippling balance sheet and the credit problem would remain. So the system depends on the banks gaming the system. In addition, housing prices are generally expected to keep on dropping. If the government buys mortgages at the current price and the prices keep on dropping, then it will be buying high and selling low, thereby hosing the taxpayers and artificially propping up housing prices.
It is worth noting that the government, not deregulation or greed, caused the mess that led to this bailout. This claim rests on two premises.
1. The government forced banks to lend to people who were poor credit risks.
2. The collapse of the mortgage market is in large part due to these people defaulting on their loans.
The first premise is uncontroversial. As Russell Roberts, an economics professor writing in the Wall Street Journal, points out, beginning in 1992 Congress pushed private-public mortgage giants, Fannie Mae and Freddie Mac, to buy more mortgages going to low and moderate income people. By 2005, the Department of Housing and Urban Development required that 22% of their mortgage purchases go to such people. In doing so, it thereby funded hundreds of billions of dollars of such loans, many of them subprime and adjustable-rate loans. In 1977, Congress passed the Community Reinvestment Act, which pressured traditional banks to lend to poor and moderate income people. In 1995 this act was strengthened and it caused an 80% increase in loans to such people. These acts along with the increased capital-gains exclusion on real estate and lowered interest rates jacked up the housing market. The average price of a house doubled from 1997 to 2005 (in contrast, inflation increased by 22%). The current default problem is due in no small part to the failure of people who were poor credit risks to pay the subprime loans and to handle vastly inflated housing prices.
Members of Congress and the White House did this initially to redistribute wealth to the poor without having to raise taxes and later in exchange for campaign money. David Boaz points out that in the last decade, Fannie and Freddie spent $170 million on lobbying, including giving $16 million to members of Congress and $10 million in soft money to the Democratic and Republican Parties. Consider the leading recipients of Fannie and Freddie campaign contributions: Sen. Chris Dodd (D-CT) (chairman of the Senate Banking Committee), Sen. John Kerry (D-MA), Sen. Barack Obama (D-IL), and Sen. Hillary Clinton (D-NY). In addition to Dodd, Rep. Barney Frank (D-MA) is the other leading villain. He helped to block any attempt to rein in Fannie and Freddie. Ideology and campaign dollars led Congress to reject the strenuous warnings and requests by the Clinton Treasury Secretary Lawrence Summers, Federal Reserve Chairman Alan Greenspan, and the Bush Administration to fix Fannie and Freddie by increasing their capital requirements, shrinking their number of risky assets, and adopting sound accounting practices.
This bill will make things worse and was brought about by corruption and leftist ideology in Congress and the White House. Every aspect of it stinks to hell.
15 October 2008
01 October 2008
Election #2: Trumpeting One's Own Virtue
The Objectivist
JOHN MCCAIN: WAR HEROES AND THE PRESIDENCY
Dunkirk-Fredonia Observer
September 7, 2008
John McCain and his supporters think that his war-hero status provides a strong reason for voters to choose him to be President. This argument is repeated by his many supporters. In McCain’s acceptance speech, six paragraphs at the culmination of his speech focused on his wartime service. Similar emphasis at the Republican nominating convention was given by former New York City Mayor Rudolf Giuliani and Vice Presidential nominee, Alaska Gov. Sarah Palin.
In 1967, on his 23rd bombing mission in Vietnam, McCain was shot down by a missile over Hanoi. The crash fractured both arms and a leg. When the North Vietnamese captured him, they crushed his shoulder with a rifle and bayoneted him. He was beaten and interrogated, but later given medical care when the North Vietnamese learned who his father was. He was then kept a prisoner from 1967 to 1973. In 1968, McCain’s father became the commander of all U.S. forces in the Vietnam theater. For propaganda purposes, the North Vietnamese offered McCain early release. He refused the offer of release, insisting that he could accept it only if all the persons captured before him were released first. In 1968, his captors tortured McCain, subjecting him to beatings and rope bindings. During this time, he also suffered dysentery. He attempted suicide, but was stopped by the Vietnamese prison guards. The North Vietnamese eventually broke him and he gave a meaningless propaganda “confession” that said "I am a black criminal and I have performed the deeds of an air pirate. I almost died and the Vietnamese people saved my life, thanks to the doctors."
Being broken was common among the tortured POWs. Besides flying bombing missions, something shared by other Vietnam-era pilots, McCain’s claim to hero status apparently rests on his refusing early release and not cooperating with his captors.
One reason the war-hero argument is unsound is that there is no correlation between being a war hero and being a good President. The standard left-wing list of great Presidents includes people like Thomas Jefferson, Abraham Lincoln, and Franklin Delano Roosevelt, none of whom saw combat. Lincoln was in the military but did not see action. For those who think the government should leave its citizens alone, Presidents Calvin Coolidge and Ronald Reagan also didn’t see combat and were arguably excellent.
Recent Presidents who were in the military include such mediocrities as George H. W. Bush (who squandered Reagan’s legacy) and terrible Presidents like Richard Nixon (corruption) and Jimmy Carter (an abject failure on both economic and foreign-policy fronts). Our recent history, then, suggests that military service does not provide a good indication of whether a candidate will be a successful President.
The second reason to think that McCain’s war-hero status is irrelevant is that it is probably relevant only as an indicator of integrity or courage. However, here there is more direct evidence on McCain’s integrity and it is not good. In 1989, the Senate Ethics Committee found that McCain exercised poor judgment when he interfered with the Federal Home Loan Bank Board (FHLBB) in their investigation of failed Lincoln Savings and Loan Association and its chairman, Charles Keating. In 1987, McCain and four other Senators pressured the federal regulators to ease up on the bank. In 1989, the FHLBB seized control of Lincoln and more than 21,000 investors, mostly elderly, lost their life savings. When it seized Lincoln, the federal government also had to assume $2 billion in debt. It is not clear how much, if any, of these losses could have been avoided if the Senators had not pressured regulators. Not only did McCain get over $100,000 in campaign contributions from Keating, but his wife and father-in-law invested in a Keating business, and McCain and his family took nine trips at Keating’s expense, including vacations to Keating’s Bahamas retreat. Unlike McCain and a fellow tarnished hero, former astronaut John Glenn (D-OH), the other members of the Keating Five had the decency not to run again.
Also, McCain is a known adulterer, who has admitted that he treated his first wife poorly. Normally this would not be the voters’ business, but McCain raised the issue when he repeatedly trumpeting his virtue on the basis of what he did in his early 30s (he is now 72).
Third, voting for candidates who run on their biography sets a bad precedent. A heroic biography is no substitute for clear guidelines on what a candidate hopes to accomplish once in office. McCain is running on his biography rather than issues. He previously opposed Bush’s tax cuts, but now supports them. He flip flopped on offshore drilling and still opposes drilling in the Alaska National Wildlife Preserve (ANWR). Why the U.S. should allow drilling offshore but not ANWR remains a mystery. He previously supported amnesty for 12-20 million largely poor and unskilled illegal aliens, but now doesn’t discuss it. He claims to support Supreme Court Justices similar to Scalia and Thomas, yet helped protect the Democrats’ ability to block such judicial candidates. It is widely reported that his advisors had a hard time talking him out of selecting Sen. Joe Lieberman (D-CT) to be his running mate, despite the fact that Lieberman is a tax-and-spend liberal. For example, in 2007 the National Taxpayers Union gave Lieberman an 11% rating, that is, an F. This leads the voter to wonder whether he is for or against tax cuts, off-shore and ANWR drilling, amnesty for illegal aliens, smaller government, and doing what it takes to appoint conservative justices.
The war-hero argument raises a separate issue, which is whether citizens should be extraordinarily grateful to those who fight foreign enemies. This country no longer makes people work in the military if they don’t want to. Like teachers, farmers, or police officers, military jobs come with a package of benefits and risks. Compared to most jobs, it is more exciting, allows for travel, job security, and exercise, and, on some accounts, improves dating and marriage prospects. Persons who enter the military via the academies get paid to receive a world-class education and often have a bright future with the military. The downside of the job is that it carries the risk that war will come and they will have to fight. Do the benefits outweigh the risks? The answer depends on the individual. If someone takes the deal because he judges it to be better than other jobs, it is hard to see why we should be grateful to him. If someone didn’t like the mix of benefits and risks, he could have done something else or held out for a better deal. The notion of overwhelming national gratitude accompanies the McCain war-hero argument, just as it did four years ago when John Kerry trumpeted his war-hero status.
John McCain is running heavily on what he did more than thirty years ago in Vietnam. History provides little evidence that being a war hero correlates with being a good President. If it is offered as evidence for McCain’s integrity, we have more direct evidence and it does not bode well for him. Voting for McCain also encourages biography-based campaigns. Even the separate claim that we should be grateful to McCain or other veterans is unclear. Sadly, despite the war-hero focus and the lack of clarity about what he will do, McCain is still a far better choice than Obama.
JOHN MCCAIN: WAR HEROES AND THE PRESIDENCY
Dunkirk-Fredonia Observer
September 7, 2008
John McCain and his supporters think that his war-hero status provides a strong reason for voters to choose him to be President. This argument is repeated by his many supporters. In McCain’s acceptance speech, six paragraphs at the culmination of his speech focused on his wartime service. Similar emphasis at the Republican nominating convention was given by former New York City Mayor Rudolf Giuliani and Vice Presidential nominee, Alaska Gov. Sarah Palin.
In 1967, on his 23rd bombing mission in Vietnam, McCain was shot down by a missile over Hanoi. The crash fractured both arms and a leg. When the North Vietnamese captured him, they crushed his shoulder with a rifle and bayoneted him. He was beaten and interrogated, but later given medical care when the North Vietnamese learned who his father was. He was then kept a prisoner from 1967 to 1973. In 1968, McCain’s father became the commander of all U.S. forces in the Vietnam theater. For propaganda purposes, the North Vietnamese offered McCain early release. He refused the offer of release, insisting that he could accept it only if all the persons captured before him were released first. In 1968, his captors tortured McCain, subjecting him to beatings and rope bindings. During this time, he also suffered dysentery. He attempted suicide, but was stopped by the Vietnamese prison guards. The North Vietnamese eventually broke him and he gave a meaningless propaganda “confession” that said "I am a black criminal and I have performed the deeds of an air pirate. I almost died and the Vietnamese people saved my life, thanks to the doctors."
Being broken was common among the tortured POWs. Besides flying bombing missions, something shared by other Vietnam-era pilots, McCain’s claim to hero status apparently rests on his refusing early release and not cooperating with his captors.
One reason the war-hero argument is unsound is that there is no correlation between being a war hero and being a good President. The standard left-wing list of great Presidents includes people like Thomas Jefferson, Abraham Lincoln, and Franklin Delano Roosevelt, none of whom saw combat. Lincoln was in the military but did not see action. For those who think the government should leave its citizens alone, Presidents Calvin Coolidge and Ronald Reagan also didn’t see combat and were arguably excellent.
Recent Presidents who were in the military include such mediocrities as George H. W. Bush (who squandered Reagan’s legacy) and terrible Presidents like Richard Nixon (corruption) and Jimmy Carter (an abject failure on both economic and foreign-policy fronts). Our recent history, then, suggests that military service does not provide a good indication of whether a candidate will be a successful President.
The second reason to think that McCain’s war-hero status is irrelevant is that it is probably relevant only as an indicator of integrity or courage. However, here there is more direct evidence on McCain’s integrity and it is not good. In 1989, the Senate Ethics Committee found that McCain exercised poor judgment when he interfered with the Federal Home Loan Bank Board (FHLBB) in their investigation of failed Lincoln Savings and Loan Association and its chairman, Charles Keating. In 1987, McCain and four other Senators pressured the federal regulators to ease up on the bank. In 1989, the FHLBB seized control of Lincoln and more than 21,000 investors, mostly elderly, lost their life savings. When it seized Lincoln, the federal government also had to assume $2 billion in debt. It is not clear how much, if any, of these losses could have been avoided if the Senators had not pressured regulators. Not only did McCain get over $100,000 in campaign contributions from Keating, but his wife and father-in-law invested in a Keating business, and McCain and his family took nine trips at Keating’s expense, including vacations to Keating’s Bahamas retreat. Unlike McCain and a fellow tarnished hero, former astronaut John Glenn (D-OH), the other members of the Keating Five had the decency not to run again.
Also, McCain is a known adulterer, who has admitted that he treated his first wife poorly. Normally this would not be the voters’ business, but McCain raised the issue when he repeatedly trumpeting his virtue on the basis of what he did in his early 30s (he is now 72).
Third, voting for candidates who run on their biography sets a bad precedent. A heroic biography is no substitute for clear guidelines on what a candidate hopes to accomplish once in office. McCain is running on his biography rather than issues. He previously opposed Bush’s tax cuts, but now supports them. He flip flopped on offshore drilling and still opposes drilling in the Alaska National Wildlife Preserve (ANWR). Why the U.S. should allow drilling offshore but not ANWR remains a mystery. He previously supported amnesty for 12-20 million largely poor and unskilled illegal aliens, but now doesn’t discuss it. He claims to support Supreme Court Justices similar to Scalia and Thomas, yet helped protect the Democrats’ ability to block such judicial candidates. It is widely reported that his advisors had a hard time talking him out of selecting Sen. Joe Lieberman (D-CT) to be his running mate, despite the fact that Lieberman is a tax-and-spend liberal. For example, in 2007 the National Taxpayers Union gave Lieberman an 11% rating, that is, an F. This leads the voter to wonder whether he is for or against tax cuts, off-shore and ANWR drilling, amnesty for illegal aliens, smaller government, and doing what it takes to appoint conservative justices.
The war-hero argument raises a separate issue, which is whether citizens should be extraordinarily grateful to those who fight foreign enemies. This country no longer makes people work in the military if they don’t want to. Like teachers, farmers, or police officers, military jobs come with a package of benefits and risks. Compared to most jobs, it is more exciting, allows for travel, job security, and exercise, and, on some accounts, improves dating and marriage prospects. Persons who enter the military via the academies get paid to receive a world-class education and often have a bright future with the military. The downside of the job is that it carries the risk that war will come and they will have to fight. Do the benefits outweigh the risks? The answer depends on the individual. If someone takes the deal because he judges it to be better than other jobs, it is hard to see why we should be grateful to him. If someone didn’t like the mix of benefits and risks, he could have done something else or held out for a better deal. The notion of overwhelming national gratitude accompanies the McCain war-hero argument, just as it did four years ago when John Kerry trumpeted his war-hero status.
John McCain is running heavily on what he did more than thirty years ago in Vietnam. History provides little evidence that being a war hero correlates with being a good President. If it is offered as evidence for McCain’s integrity, we have more direct evidence and it does not bode well for him. Voting for McCain also encourages biography-based campaigns. Even the separate claim that we should be grateful to McCain or other veterans is unclear. Sadly, despite the war-hero focus and the lack of clarity about what he will do, McCain is still a far better choice than Obama.
10 September 2008
Election #1: Enthusiastic Tax-Collector for the Welfare State
The Objectivist
BARACK OBAMA: WILD-EYED RADICAL
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.
BARACK OBAMA: WILD-EYED RADICAL
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.
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