Saturday, October 25, 2008

The Truth About Taxes

As always CRAFT does not endorse any candidates. However readers by now know where I (Cathy) stands on the candidates. The following two stories below are to aid our readers in making educated decisions before voting.

The first story appears in the Boston Herald

The truth about taxes

Editorial, Boston Herald
October 24, 2008

As the economy continues to give working Americans the shivers, it’s time to take a serious look at presidential nominee Barack Obama’s tax plan.

Obama’s Joe the Plumber moment exposed the flaw in the candidate’s plans to increase the income tax rate for “the wealthy” - including small business owners - all the while giving refundable tax credits to those who might not even be paying federal income taxes. Yes, it’s blatant income redistribution, but there’s more.

If you liked the Clinton era taxes, you’re gonna love an Obama administration. Obama’s Web site spells it out: “The top two income tax brackets would return to their 1990s levels of 36 percent and 39.6 percent.” The capital gains tax on those same families would increase from 15 percent to 20 percent. The same goes for taxes on dividends.

You think the credit market is tight now? Well, just wait for these tax “reforms” to further dry up capital.

The Obama tax plan also has a list of domestic tax “loophole” closings. Those of us who have seen similar proposals offered here by a Republican and then a Democratic governor know that “loopholes” are often in the eye of the beholder. And when corporate “loopholes” are closed, those higher costs are invariably passed along to consumers.

This candidate who says he wants to increase incentives to make this nation less dependent on foreign oil also wants to eliminate “special tax breaks for oil and gas companies,” including “manufacturing deductions for oil and gas firms.” Yep, that will encourage domestic production!

Whatever tax hike Obama hasn’t thought about, congressional Democrats surely will. Our own Rep. Barney Frank was quoted in yesterday’s Wall Street Journal as saying that after an immediate “increase in spending” by Congress to stimulate the economy, “I believe later on there should be tax increase.”

So there you have it - the unvarnished and rather costly truth.

The second story appears in the Wall Street Journal.

Obama and the Tax Tipping Point
How long before taxpayers are pushed too far?

What happens when the voter in the exact middle of the earnings spectrum receives more in benefits from Washington than he pays in taxes? Economists Allan Meltzer and Scott Richard posed this question 27 years ago. We may soon enough know the answer.

Barack Obama is offering voters strong incentives to support higher taxes and bigger government. This could be the magic income-redistribution formula Democrats have long sought.

Sen. Obama is promising $500 and $1,000 gift-wrapped packets of money in the form of refundable tax credits. These will shift the tax demographics to the tipping point where half of all voters will receive a cash windfall from Washington and an overwhelming majority will gain from tax hikes and more government spending.

In 2006, the latest year for which we have Census data, 220 million Americans were eligible to vote and 89 million -- 40% -- paid no income taxes. According to the Tax Policy Center (a joint venture of the Brookings Institution and the Urban Institute), this will jump to 49% when Mr. Obama's cash credits remove 18 million more voters from the tax rolls. What's more, there are an additional 24 million taxpayers (11% of the electorate) who will pay a minimal amount of income taxes -- less than 5% of their income and less than $1,000 annually.

In all, three out of every five voters will pay little or nothing in income taxes under Mr. Obama's plans and gain when taxes rise on the 40% that already pays 95% of income tax revenues.

The plunder that the Democrats plan to extract from the "very rich" -- the 5% that earn more than $250,000 and who already pay 60% of the federal income tax bill -- will never stretch to cover the expansive programs Mr. Obama promises.

What next? A core group of Obama enthusiasts -- those educated professionals who applaud the "fairness" of their candidate's tax plans -- will soon see their $100,000-$150,000 incomes targeted. As entitlements expand and a self-interested majority votes, the higher tax brackets will kick in at lower levels down the ladder, all the way to households with a $75,000 income.

Calculating how far society's top earners can be pushed before they stop (or cut back on) producing is difficult. But the incentives are easy to see. Voters who benefit from government programs will push for higher tax rates on higher earners -- at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country.

Other nations have tried the ideology of fairness in the place of incentives and found that reward without work is a recipe for decline. In the late 1970s and throughout the 1980s, Margaret Thatcher took on the unions and slashed taxes to restore growth and jobs in Great Britain. In Germany a few years ago, Social Democrat Gerhard Schroeder defied his party's dogma and loosened labor's grip on the economy to end stagnation. And more recently in France, Nicolas Sarkozy was swept to power on a platform of restoring flexibility to the economy.

The sequence is always the same. High-tax, big-spending policies force the economy to lose momentum. Then growth in government spending outstrips revenues. Fiscal and trade deficits soar. Public debt, excessive taxation and unemployment follow. The central bank tries to solve the problem by printing money. International competitiveness is lost and the currency depreciates. The system stagnates. And then a frightened electorate returns conservatives to power.

The economic tides will not stand still while Washington experiments with European-type social democracy, even though the dollar's role as the global reserve currency will buy some time. Our trademark competitive advantage will be lost, and once lost, it will be hard to regain. There are too many emerging economies focused on prosperity and not redistribution for the U.S. to easily recapture its role of global economic leader.

Tomorrow's children may come to question why their parents sold their birthright for a mess of "fairness" -- whatever that will signify when jobs are scarce and American opportunity is no longer the envy of the world.

Mr. Lerrick is a professor of economics at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.

Corrected typo 10/25.

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