Richmond College '10
In last Friday's Presidential Debate, the economy was the first topic discussed. While the candidates' answers to the Wall Street crisis were less than groundbreaking, both laid out drastically different economic polices in regards to taxes and spending. Obama's plans for fixing our economy center on a pledge to raise taxes to the top 5 percent of income earners and use the revenue that he claims would be generated from this to fund advances in human capital. As his argument goes, the American economy would be built from the bottom up and not the top down. Most Americans will be drawn to lower taxes and more social programs, but there are some very real concerns with the effectiveness and execution of such an approach.
Under Obama, the top Marginal Tax Rate would be raised to 39.6 percent from the current 35 percent. This may seem like a minor change, but a more important measure of the change in taxes can be seen by considering the total combined marginal tax rate on additional labor earnings, which includes state income tax, Medicare tax and Obama's new social security tax. Under Obama, this would rise from around 44 percent to slightly more than 62 percent. This would affect pocketbooks. In that spirit, Obama's proposal can be considered from the amount of after-dollar-earnings a person in this top marginal bracket will keep. In other words, if this bracket receives 55 cents for every dollar after taxes, under Obama it would plummet to 37 cents on the dollar.
An important principle that Obama apparently has not considered is that higher revenues are more a function of economic growth than tax rates. The best way to achieve such economic growth is actually through tax cuts. I am not looking to advocate for a return to the days of wholesale supply-side economics, but some taxes do produce more revenues with lower rates. The way to raise revenues for human capital investment and social programs is not through raising tax rates on the wealthiest Americans. Instead, with a reduction of the capital gains and income tax our economy can rebound and revenues will be vastly increased to allow for more of the social programs Obama desires.
Consider the age-old push from the left that wealthy Americans "pay their fair share." In 1981, as the Carter presidency ended and Reagan was sworn in, the top tax rate for Americans was 70 percent and the Capital Gains rate was 45 percent. With these rates, the top 1 percent of American earners paid around 17 percent of the nation's total income taxes. Fast forward to 2005, a year in which the top tax rate was down to 35 percent and the capital gains limited to 15 percent. During this year the top 1 percent of earners paid 39 percent of the nation's income taxes. Couple this with the academic work of Martin Feldstein, particularly in terms of the Capital Gains tax, and a rising consensus has emerged that low rates in fact yield higher revenues in terms of income.
Even if you have read this far and still feel Obama's plan is justified, I will leave you with one last thought: The aforementioned $250,000 income plateau does not necessarily mean greedy millionaires. It is not an exaggeration to point out that two-earner, middle-class families (perhaps even with kids and a high cost-of-living) will be pinched by the raises. Similarly, although Obama wants to eliminate Capital Gains tax for small businesses and give them $500 tax credits, this denies the fact that many of these businesses fall in the top income tax bracket. Thus they will simultaneously be victim to a tax break and tax raise under an Obama Administration. Not exactly the most consistent policy to promote entrepreneurship.
Regardless of my policy differences with Obama, I understand his concern lies with raising revenues to support lower-earning Americans. If he wins this November, I hope that he takes the time to bone-up on his tax knowledge so that he at least has the right tools and strategy to achieve his vision.
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