Wednesday, August 4, 2010

Tax Suicide

After spending money like Michael Jackson, (deficit this year at $1.5 trillion) Obama and his Democrat pals are suddenly concerned about the “cost” to the government if they do not raise taxes at the end of the year. The so called “Bush tax cuts” enacted in 2001 and 2003 got past the Democrats at the time by having an expiration date and that time runs out on December 31st of this year. If Congress does nothing, taxes on everyone will go up… a bunch. The taxpayers in the bottom groups and the elderly will take a huge hit. You can figure out how much you will get nailed by going to the American Tax Foundation website and entering your numbers into their “tax calculator”.

First of all, I have a real problem with this “cost to the government” characterization of NOT RAISING TAXES. Chris Wallace raised this Democrat talking point last week on “Fox News Sunday”. I came out of my chair and slopped my coffee on myself. “What?!” I shouted at the TV. It’s absurd. If the government allows you to keep more of your hard earned money by NOT raising taxes, it’s a gift or a “cost” to the government? This assumes that all your money belongs to the government.

Second, this Administration has already raised taxes this year on corporations, tobacco and small businesses. And, let’s not forget the $500 billion in tax increases contained in ObamaCare. Despite Obama’s repeated promise not to raise taxes on anyone making less than $200,000, the above taxes already hit the lower and middle classes. If Congress does not act, these folks will be stunned by how much their taxes increase next year. The American Tax Foundation estimates that a married couple with two children earning $45,000 per year will pay $3000 more in taxes in 2011.

Other little changes that will whack the middle class and retirees include:
  • The child credit will drop to $500 from $1000 per child.
  • “Marriage Penalty” will return (CBO est. in ’96=$1400).
  • Small business will no longer be able to expense equipment purchases.
  • Retirees who rely on dividends and capital gains will see the rates go from 15% to a max of 39.5% on the former and from 15% to 20% on the latter.
  • The Alternative Minimum Tax will hit about 20 million more taxpayers.
  • Death taxes will go from 0% this year to 55% next with a reduced limit of $1 million for an estate. One million is not a lot these days for a farm or small business and the heirs will have to sell the farm at fire sale prices to pay the taxman.
My concern is that Congress has a lot on its plate right now (the SALT treaty with Russia and the Kagen confirmation among others) and not many weeks before they all head home to try and get re-elected. They just may not get an agreement to keep the taxes where they are and, BING, like the time running out on your parking meter, everyone gets a whopping tax increase on Jan 1st.

The White House has floated the idea of keeping rates where they are for all but the “rich”, those making $200,000 as individuals or $250,000 as a couple. This plays to Obama’s pledge and the Democrat demonization of the rich. Ample historical evidence exists to prove that raising taxes on this group is a lousy idea, especially as the US tries to struggle out of a deep recession.

Art Laffer’s excellent article in the WSJ (“Soak-The-Rich-Catch-22”, Aug 2, 2010) cites some interesting statistics. Since 1978 across the board rate cuts have resulted in the top 1% of taxpayers increasing their share of taxes from 1.5% of GDP in ’78 to 3.3% of GDP in 2007 (last available figures). Receipts from the bottom 95% fell over the same period from 5.4% to 3.2%. IOW, the rich paid a larger share with tax reductions. Conversely, increases in rates on the top 1% of taxpayers under Johnson, Nixon, Ford and Carter resulted in a reduced share of taxes for top earners from 1.9% to 1.5%.

The CBO estimates on how much money will be raised by increased taxes are consistently wrong. That’s because they use a “static” analysis that excludes any consideration of people’s behavior. Nice recent example: Sen. John Kerry’s $7 million yacht. He had it built in NZ rather than one of the many great shipyards on the East Coast. Then he docked it in RI to avoid the $500,000 tax and $70,000 annual registration in his home state of MA. The wealthy are much more able to manage their affairs to reduce their taxes. Like Charlie Rangle, for instance.

High rates on the wealthy results in less employment, output, sales, profits and capital gains and all that means lower tax receipts. This has been demonstrated time and again with the capital gains tax. When the rate is reduced, receipts go up, and down when rates are raised. Charles Gibson posed this historical observation to Obama in an enlightening interview on ABC during the campaign. BHO was stumped by the question of why he would raise rates if receipts would clearly go down. After stumbling around he finally came up with “It’s a question of fairness.” Fair to whom? The 80% of Americans who own stock?

A number of Democrats realize a tax increase on anybody at this time is a dumb idea. Even Christina Romer, White House Economic Advisor to Obama has broken ranks from the party line and wrote in the June issue of The American Economic Review, “Our estimates suggest that a tax increase of 1% of GDP reduces output by nearly 3%. The effect is highly significant.”

Obama, Pelosi and Reid would be well advised to listen to her and one of their former Democrat Presidents who said:

“Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle- workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why in today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit- why reducing taxes is the best way open to us to increase revenues.”

John F. Kennedy

Economic Report of the President


President Hoover raised the top tax rate to 63%. Roosevelt raised it again to 79% plus increasing corporate and other taxes.

The economy went into a double dip depression. Why, if taxes are raised now, do we think that this time it will be different?

1 comment:

Heide said...

I've no faith that any politician or political party will stand by a pledge to reduce taxes. So far my family has been hit countless times, but has yet to benefit from any of the cuts or programs offered by the current administration. We are fairly frugal people. My husband and I both have college degrees, have served in the military (extra training and work experience)and yet we wonder about our ability to remain employed. Several years ago Brian lost his job (he worked at Verizon and it was cheaper to have the IT work done overseas). Thank heavens we do live frugally and try to save because 10 months of being unemployed wiped us out and we had to start over again with our savings. We have no sense of security whatsoever. When income and property taxes rise they impact our family tremendously. We've never been late on any house payments, etc. but sometimes it's a struggle. So be it. Nobody said that life was easy. What pisses me off is seeing the government be wasteful. We need roads, military and infrastructure, spending money there isn't my issue. However, many of the social programs are ridulous, unnecessary and benefit only a few select people who seldom contribute to the coffers. Recipients of government benefits can rest securely knowing that their children will get to go to college on grants, and that housing and medical will be provided for them because they fit into a special niche. I read an interesting article recently about the disappearing middle class. What caught my attention most about it was that my mother made these predictions years ago with the introduction of several policies. Too bad we couldn't clean house in DC and go back to a bare bones government that provided just the essentials.