Tuesday, October 14, 2008

On Taxes and Government Spending...

It doesn't make any sense to raise taxes on anyone when people are paying more at the pump, spending double on essentials like groceries and utilities and taking money out of savings to cover health care costs. Our economy won't grow if our small business owners and average investors are saddled with increased capital gains rates, higher taxes and additional government regulations, on top of record-high energy and gas prices!

Raising taxes and growing government have been hallmarks of the Democratic party since its inception. Think New Deal, Great Society, etc...today their big government agendas come in less obvious packaging, but the party of FDR and LBJ is still in favor of government-subsidized social services and welfare programs, abandoning free market principles, and paying for these and other programs by redistributing wealth from productive and prosperous Americans to those who are less industrious.

Obama might talk about standing up to the entrenched special interests in his own party, he might give speeches about cutting spending and lowering taxes for middle income families, but he hasn't done anything in his entire political career that would lead me to believe he will actually be a small government, low taxes crusader.

Again, the only legitimate actions I can point to, because his record is so thin, are his votes in the Senate...Obama voted nine times against lowering the capital gains tax rate, seven times against implementing tax incentives for small businesses, six times against lowering the estate tax and three times against repealing a more than decade-old increase in taxes on Social Security benefits, among other votes.

Obama's economic agenda will have a detrimental effect on an already unstable economy. Bigger government and higher taxes equals less money for people to spend. His corporate tax increases will lead to more unemployment. Companies don't hire new American workers when they are forced to pay higher corporate, payroll, dividend and capital gains taxes. If they want to stay in business, they'll cut jobs or just ship their work overseas. Hitting individual investors with higher fees makes it less attractive to enter the market and less money in the markets lead to slowed economic growth and recession.

To strip this topic down to my core argument, McCain has a long history of cutting taxes, opposing earmarks, reducing wasteful spending and advocacy for smaller government. Obama does not.

Yet people are still talking about Obama's economic plan, how he's going to help the middle class, and be more fiscally responsible and so forth. According to the Obama website:

The Obama tax plan would cut taxes for 95% of workers and their families with a tax cut of $500 for workers or $1,000 for working couples. The top capital-gains rate for families making more than $250,000 would return to 20%, up 5% from the current 15% rate set by the Bush tax cuts. Middle class families will see their taxes cut – and no family making less than $250,000 will see their taxes increase.

At worst, Obama's tax proposal is a naked attempt to help the middle class by penalizing the wealthy, at best, it displays a naive misunderstanding of the origins of middle-class comfort.

Consider that roughly 60 percent of Americans are even paying federal taxes (If you make less than $50K annually, you generally aren't paying any taxes). Enter those making over $250K, which include many middle income families in coastal areas and large cities, as well as a wide percentages of small business owners across the country.

At $250,000 in taxable annual income, a married couple filing taxes jointly would now pay about $62,000 in federal income taxes. By contrast, a couple earning $50,000 a year, which is about the median income in the U.S., would pay $6,750 in taxes. Although the $250,000 couple is in the 33 percent tax bracket (meaning every additional $1 in taxable income they would earn is taxed at 33 percent), the couple is actually paying about 25 percent of their total taxable income to the feds. At the same time, the median income couple pays about 13.5 percent of their income in taxes. In actual dollars, this translates into slightly less than 10 dollars in taxes from the higher income couple for every one collected from the median income family. The effective tax rate of a family with a taxable income in the range of $250,000 remains at slightly under double that of a couple earning $50,000.

Obama and people who think like him look at these numbers and argue that, after paying income taxes, the $250,000 family still has about $188,000 left to spend on other things (including paying other federal, state and local taxes, housing, food, etc.), while the $50,000 family has about $43,250 left. Obama believes that this is too much of an income disparity, so he'll raise taxes on the higher income family to finance his "middle class tax cut" and offer tax rebate programs to lower income families that pay no taxes at all.

Obama characterizes this as his attempt to create "a sense of balance fairness in our tax code."

But Obama never really explains what fairness actually means to him. Instead he personalizes it, and says things like, "It is time for folks like me who make more than $250,000 to pay our fair share."

Fairness is a cure-all for every national ill according to Obama, "We will save Social Security for future generations by asking the wealthiest Americans to pay their fair share." And on energy, "The first part of my plan is to tax the windfall profits of oil companies and use some of that money to help you pay the rising price of gas."

Obama would even "look at raising the capital gains tax for purposes of fairness." Despite the fact that raising them would affect 100 million Americans and decrease overall government revenues.

Supply-side economic theory holds that wages can only rise when the amount of available investment capital increases. Simply put, without capital there are no wages. In short, a 5% rate hike on income of $250,000 to pay for a proportionately sized tax cut on income of $50,000 is bad economic policy as it will lessen the overall amount of capital in the market.

Invariably, money that the government doesn’t confiscate (tax) from the rich, is saved and lent to businesses and invested in entrepreneurial ventures reliant on capital in order to grow. For the middle class this is a big deal because these savings either fund new forms of employment, or additional remuneration. In today's reality, the single best way to increase middle-class income is to reduce the success penalty on those in possession of the greatest amount of capital.

Obama's tax policies amount to an attempted purchase of votes by appealing to the short-term economic interest of a portion of the electorate at the expense of the long-term economic health and competitiveness of our country as a whole. The middle-class Americans he claims to help will get hosed in the end because Obama's "tax cuts" are not cuts at all, just wealth redistribution proposals that fool the economic illiterate (myself included) and appease the uneducated poor and economic leftists.

The same middle class workers who'll pay less in taxes under Obama stand to lose their jobs to pay for the tax relief they receive! Obama isn't offering tax cuts, he is specifically saying to those who pay little or no income taxes that the government will write you a check on behalf of your wealthier and more prosperous neighbors.

Look at it this way...Lets say you are a waitress at a local Diner. The Diner owner has done the analysis of the profits from 2008 where he made $275,000 dollars. That's good money for a restaurant.

Now in 2009, after the Obama tax plan becomes law, the owner looks back at those numbers and sees that if he makes $275,000 again this year that he will get a LARGE tax increase. If he can cap those earnings at $245,000 he will actually make more money.

So, he decides to close a few hours earlier. Or closes all day on Sundays now. Or whatever he decides to do to cap his profits. This will have effects on his employees and customers. If you're a waitress who expects 40-45 hours a week, you may only get 30-35 now. The customers she was relying on for tips aren't coming in as often as before. The waitress can't pay her bills with her new hours, but Obama will give her a $200 tax credit!

Obama told a tax-burdened plumber over the weekend that his economic philosophy is to "spread the wealth around." Obama made the remark, caught on camera, after fielding some tough questions from the plumber Ohio, where the Democratic candidate canvassed neighborhoods and encouraged residents to vote early. "Your new tax plan is going to tax me more, isn't it?" the plumber asked, complaining that he was being taxed "more and more for fulfilling the American dream."

"It's not that I want to punish your success. I just want to make sure that everybody who is behind you, that they've got a chance for success too," Obama responded. "My attitude is that if the economy's good for folks from the bottom up, it's gonna be good for everybody...I think when you spread the wealth around, it's good for everybody."

According to the most recent (2006) data released by the IRS, the top 1 percent of filers paid nearly 40 percent of all income taxes; the top 5 percent paid 60 percent of all income taxes. The bottom 50 percent paid virtually no income taxes (3 percent of all income taxes paid).

Increasing the tax burden on productive citizens in the name of "neighborliness" as Obama puts it, and distributing the money to people having a "hard time" isn't neighborliness, it's class warfare, it's Socialism and it's dangerous. In short, I disagree with the idea of "helping" the poor and middle class by taxing the rich because doing so reduces the earnings of all those not yet rich.

Despite Obama's promises, the middle class will ultimately shoulder Obama's fiscal burden in terms of higher taxes and lower economic growth. This isn't free enterprise. It's big government and the only people who will benefit are the central planners in Washington. To pay for his plan, Obama says he will end the war in Iraq, permit the Bush tax cuts to expire for households earning more than $250,000 and "change our tax code," which "has been rigged by lobbyists with page after page of loopholes that benefit big corporations and the wealthiest few."

But these steps would not come close to paying for Obama's spending proposals that will cost approximately $1 billion-a-day. Assuming they offset $100 billion of new spending, paying for the other $265.6 billion would require an across-the-board income tax increase of 19 percent. This figure does not reflect the tax increase that would be necessary to pay for Mr. Obama's "tax cuts."

Regarding the lobbyists who have "rigged" the tax code with "loopholes that benefit big corporations and the wealthiest few," two facts are worth noting. First, as total tax receipts increased from 16.5 percent of gross domestic product (GDP) in fiscal 2003 to 18.8 percent of GDP in fiscal 2007, corporate income taxes increased from 1.2 percent of GDP to 2.7 percent, the highest level in 30 years. Thus, the four-year proportionate increase in corporate income tax revenue (from 1.2 percent to 2.7 percent) accounted for 65 percent of the proportionate increase in total revenues (from 16.5 percent to 18.8 percent). This is a major windfall for the Treasury, reaped by LOWERING the tax rates on business and investment.

Obama says he wants U.S. corporations to stop "shipping jobs overseas" and bring their cash back home. But if he really wanted U.S. companies to keep more of their profits in the states, he'd be calling for a reduction in the corporate tax rate. We now have the second highest corporate tax rate in the civilized world, making America a less attractive place for companies to do business. Without capital, businesses can't expand their operations and hire more workers.

Low-rate flat-tax plans are proliferating around the world. Emerging nations in Eastern Europe and Asia are lowering the tax penalties on capital — and reaping the economic rewards. Obama completely ignores this. American global competitiveness would suffer enormously under Obama, as would job opportunities, productivity and real wages.

Furthermore, at a time when small businesses are struggling to make payroll, Obama also wants to raise the minimum wage and index it for inflation. This is yet another sure way to add to operating costs and slow the creation of new jobs.

As far as the disproportionate share of the tax burden already shouldered by the "wealthiest few," Obama's plan would increase the disparities between rich and poor. According to a December 2007 CBO study, in 2005 the top 1 percent of households earned 18.1 percent of income and paid 38.8 percent of individual federal income taxes and 27.6 percent of all federal taxes. The top 20 percent earned 55 percent of income and paid 86.3 percent of individual federal income taxes and 68.7 percent of all federal taxes.

The centerpiece of Obama's plan is to end the Bush tax cuts and allow the top two tax rates to return to 36 percent and 39.6 percent. He would also phase out personal exemptions and deductions for those with income in excess of $250,000. Again, with an eye toward punishing those who have achieved economic success, Obama plans to end the Social Security payroll-tax cap for those making more than $250,000. The cap is currently set at a more reasonable $102,000.

Under Obama's plan, these individuals will face a tax rate of 15.65 percent from payroll taxes combined with the top income-tax rate of 39.6 percent for a final tax of more than 56 percent on each additional dollar earned. As if those proposals were not enough to weigh the U.S. economy down, Obama plans to nearly double the top dividends and capital-gains rate from the current 15 percent rate to as high as 28 percent. Indeed, while most tax cuts may result in slight revenue declines even as they spur economic growth, as shown above, Bush's dividend and capital gains tax cuts actually have increased federal revenue.

If Mr. Obama insists upon having this tiny fraction of Americans shoulder the cost of his spending and tax proposals, the tax increase on those taxpayers would have to be huge - far larger than the 19 percent tax increase described above. This would slow investment, employment and economic growth - and, yes, total governmental receipts.

On the spending side of things, Obama pledges to follow President Bush in rapidly increasing the size and scope of the federal government. Not much for conservative fiscal priniciples, Bush allowed the federal budget to grow from 18.4 percent to 20 percent of the nation's gross domestic product. To contrast, former President Bill Clinton oversaw a reduction of federal spending from 22.1 percent to 18.7 percent of GDP (Clinton also wasn't fighting two wars at once). Obama touts a 10-year, $150 billion program to "establish a green energy sector," a 10-year, $60 billion "National Infrastructure Reinvestment Bank," to rebuild highways, bridges and other public works, and a nearly universal health care plan with an annual price of $100 billion along with a host of other non-discretionary spending items. In addition, Obama ruled out any reductions in his major domestic spending proposals in the wake of the $700 billion Wall Street bailout bill.

The National Taxpayers Union Foundation added up all the spending promises made by the two candidates and found that McCain's would cost taxpayers an extra $68 billion a year. Obama's add up to around $344 billion a year. Obama's tax plan would cut federal receipts by $2.7 trillion over the next decade, compared with $3.6 trillion for McCain.

Obama claims he'll pay for all his new spending with higher taxes on the rich and spending cuts, yet while he talks about reducing government waste and abuse, Obama voted against paying down the federal debt by reducing spending on programs rated "ineffective" by the Program Assessment Rating Tool. McCain has said repeatedly that, if elected president, he would freeze discretionary spending and perform "top-to-bottom reviews of all federal programs to weed out failing ones."

Clearly, Obama cannot keep his fiscal promises because he cannot cut taxes, increase spending and balance the budget. To cut taxes, he will have to abandon either his plans to increase spending and/or balance the budget. To provide universal health care, he will need to break his promise to provide middle class tax cuts and/or balance the budget. To balance the budget, he will probably need to abandon his tax plan and/or his promise for universal health.

It will be far easier for Obama to get a Democrat Congress to approve new spending than to enact the measures needed to pay for it. Unless Obama is willing to take on his own party with the veto pen, something he hasn't shows a proclivity for in the past, we should expect four years of irresponsible budgeting and deficit spending from him and little hope to see a more balanced budget by 2012.

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