Class warfare has become a central theme of the Obama campaign. In his 2013 budget released earlier this week, President Obama proposed major tax hikes on the wealthiest Americans – those making $200,000 per year or families making over $250,000. Indeed, the “debt reduction” that the president claims is dependent largely on these tax increases alone. Class warfare and raising taxes on the rich may be beneficial to his political campaign, but it is bad for the economy as it merely redistributes wealth, not create it. The Republican nominee needs to be committed to capitalism and battle the President’s class warfare, big government, Keynesianeconomic rhetoric using free-market principles, stressing economic growth, job creation, and wealth creation through lower taxes, less regulation, and smaller government. Despite what the President claims, his budget does not promote growth and has the potential to be a weak spot that Republicans can capitalize on.
Included in the President’s proposal is around $1.5 trillion in new revenue coming from tax hikes on the wealthy and corporations. These tax raises take various forms; a 9% raise in capital gains tax rates, the dividends rate jumps 25% from 15-40%, the carried interest tax on investment partnerships rise from 15 to 39.6%, and the estate tax rises to 40%. In addition, the budget calls for allowing the Bush-era tax cuts to expire, raising the top-level income tax rates to 39.6%. Then there’s the new “WarrenBuffet Rule“, which requires all those making more than $1 million per year pay at least 30% of their gross income in taxes.
Obama signing The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
Perhaps the most damning, however, is the tax hike on businesses; Obama has yet toannounce his new corporate tax rates, but included in the budget is a “financial crisis responsibility fee” on large banks that amounts to $61 billion, taxing energy companies $30 billion over a decade by ending tax cuts, $148 billion in new taxes on multinational corporations, and another $87 billion by changing how businesses value their inventory.
In all, that amounts to an estimated $1.5 trillion, or $1.9 trillion according to Paul Ryan, dollars in new tax revenues. Somehow Democrats think that by taxing businesses and the rich and spending it on social programs, infrastructure projects, and newgovernment jobs that it will help boost the economy and speed up the recovery. Obama says that if everyone pays “their fair share”, middle and lower-income people will benefit, its assumed from expanded social programs or new job creation.
The problem is that Obama is dead wrong. First, this class warfare “fair share” rhetoric is disingenuous at best. The wealthy that will be hit by his tax hikes already pay roughly 40% of all income taxes and 25% of total taxes. An astonishing 70% of all income taxes come from only the top 10%. In fact, 79 million Americans, or a stunning 46.5% of Americans pay absolutely ZERO taxes, roughly 50% paid no federal income taxes, and 30% actually had a net income from the government. This is likely to continue since, contrary to the administration’s unemployment rates, the percentage of the population currently employed is the lowest its been in decades, around 63%. Obama must have a different definition of fair than the rest of us, because 10% of the population paying 70% of the income taxes and 50% completely carrying the other half seems pretty unfair to me.
It isn’t the top tax payers or corporations that get hurt when corporate and business taxes are raised, however, but its the common, everyday, middle-class individuals that get hurt the most. It might be nice to imagine a corporation taking out the extra money from increased tax rates from its profits or revenue, but in reality those taxes are passed on to consumers, employees, and shareholders. Corporations will raise prices on consumers to make up the profit they lost to taxes, making everyone pay more for the same products. In an effort to ease the price hikes, some of the taxes will be at the expense of employees as the business isn’t able to pay their salaries, asking for concessions, lay-offs, and putting a freeze on new hires. Finally, the shareholders, which includes employees and anyone else who has the corporation’s stock in their 401k, pension, or IRA, are hit by lower dividends, capital gains, and value.
Graph showing corporate income tax rates as a percentage of income in industrialized nations. The U.S. comes a close second to Japan
Second, raising tax rates on individuals and businesses are not going to promote growth but do the opposite; both harm economic growth. That $1.5 trillion isn’t going to come from nowhere; its money that would otherwise be invested back into the economy. Sure, the government will spend some of that money on stimulus-style projects such as infrastructure projects, healthcare, and welfare programs, but it has been proven time and time again that the private sector is far more efficient and productive at investing money than government. In reality, Obama is actually removing money from the economy, which obviously decreases money available for growth, and moves it to another sector of the government’s choosing, such as “green” energy (see Solyndra). No new wealth is being created, no new jobs, new investment, nor new growth. It is merely redistributing the money, and as this administration has obviously shown, government knows best (hint of sarcasm). Less money in the hands of individuals and businesses means less demand for goods and services, investment and slower growth.
Not only will the higher tax rates remove money from the economy, but it will discourage new investment, entrepreneurship, and risk-taking, with similar results. Investors will be discouraged because there is less money to be made. Taking risks would be less profitable, and thus less attractive, as the government takes an ever larger and larger share of the profits made on investment. Entrepreneurs would be less able to obtain capital, and those that could may be discouraged from doing so because it would be less profitable as a result of the higher taxes. It would become smarter and more profitable for both businesses and people to save their money rather than reinvest it into the economy. All lead to less job creation, less innovation, and less investment. Or put simply: less growth.
An example of the Laffer Curve with a 70% maximum rate.
Finally, higher tax rates could translate into lower tax receipts. It’s whats known as theLaffer Curve, and it shows how progressively higher tax rates eventually translate into lower tax revenue. The most basic reason behind the Laffer Curveis that after a certain point, increasing gross income reduces net income, or making more money becomes less profitable as the government takes an ever larger share. This eliminates the incentive to working harder, expand business, increase production, or invest. Corporations and wealthy individuals would also actively seek ways to pay lower taxes on their income and savings. Some will horde their money in savings accounts, while others will invest in products with no dividends or invest in Roth IRAs, Exchange Traded Funds (ETF), or long-term positions to avoid the capital gains taxes. Others would move their money, corporations, or investments in off-shore tax havens. The result is capital flight, where investors move their money to foreign investments, as happened in France before it enacted its wealth tax. On the state level, and possibly national and international, corporations and individuals may leave entirely, taking their tax revenue with them. Detroit is a prime example; over the past 30 years as the middle-class and wealthy people left the city the tax-base disappeared and revenue plummeted. Today Detroit is facing a severe debt crisis and possible takeover by a state-appointed Emergency Financial Manager.
In the end, all the Democrats and President Obama are doing by raising taxes is moving money from one or many sectors to another. No new wealth is being created, nor is the economy growing. The tax money used on infrastructure and healthcare would have been spent, probably more wisely, by the private sector on investment, jobs, and growth. Had that money remained in the private sector it would have been more productive and resulted in more economic growth because of government inefficiency, waste and corruption. Less capital in the economy and private sector means less investment, expansion, demand, and jobs. What the U.S. needs is wealth creation and economic growth, and that is achieved through free-market economic principles, lower taxes, and less regulation.
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