Political Hay
Take the Tax Debate to Obama
The election may be over, but the fight over tax policies is just beginning — and it’s one that Republicans and conservatives can’t afford to pull a McCain on.
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Economic Growth
During his campaign, Obama successfully focused on a theme of rebuilding the middle class, particularly through his supposed middle-class tax cut. This is classic Saul Alinsky strategy, which called for radical reformers to appeal to the middle class, rather than scaring them away with overt radicalism.
One key way for conservatives and Republicans to counter this theme and appeal to the middle class in the future is the issue of economic growth. This was central to the political success of Reagan and the Republicans in the 1980s, embracing the policies and rhetoric developed by Jack Kemp in particular. The economic growth theme is what takes conservatives from the mid-40s in public support to the mid-50s. This theme is also essential to appealing to the Hispanics and other minorities that strongly supported Obama and the Democrats this time. This is why it is so important to set the record straight on the Reagan economic boom.
The Obama tax plan is vulnerable on this score, because it is so anti-growth. As I have recounted before as well, Obama’s plan calls for raising the marginal tax rates on virtually every federal tax — individual income taxes, capital gains taxes, dividend taxes, payroll taxes, death taxes. It effectively calls for raising corporate income taxes by 25% by closing loopholes and tax havens, even though America’s corporations already suffer the second highest corporate tax rates in the industrialized world. Obama ridiculed McCain’s proposals to reduce those excessive rates as still more tax cuts for the rich and corporate fat cats.
Raising all of these marginal tax rates together amounts to a vigorous assault on the incentives for saving, investment, entrepreneurship, business creation and expansion, job creation, risk taking, work, and overall economic growth. This argument is not hard for the average voter to understand, and polls and focus groups show that they do respond to it. With the current weak economy, this argument may be successful in derailing most or even all of these tax increases.
A second chapter of the Obama tax plan is 9 or 10 or more new or expanded refundable income tax credits for various social purposes, such as child care, welfare, health care, education, housing, retirement, and others. Refundable means that if a worker has little or no income tax liability, the government will send him a check for the full amount of the tax credit anyway. In these cases, the tax credits are not tax cuts reducing any tax liability, but new government spending programs hidden in the tax code. Because Reagan and the Republicans have already cut taxes so much for the middle class and lower income workers, Obama is quite wrong in calling them tax cuts for these workers.
Tax credits do not promote economic growth as reductions in marginal tax rates do because they do not promote incentives to any significant degree. A tax credit is like a cash grant, and a cash grant for child care does nothing to promote the economy. At best, a tax credit affects incentives only up to the amount of the credit, in general a few hundred or a couple of thousand dollars. But the incentives from a reduced tax rate affect all economic decisions and resources, including those from abroad.
Indeed, the tax credits negatively affect economic growth because they are phased out over various middle and higher income levels, effectively increasing marginal tax rates for those incomes. Removing a tax credit as income rises has the same effect on incentives as imposing a tax as income rises.
This is not to argue that all tax credits are always a bad idea, even refundable ones. Rather, the argument is that, first, refundable income tax credits for those with no income tax liability are not tax cuts. They are income redistribution, which is basically the opposite of tax cuts. And, secondly, income tax credits do not promote economic growth.
Liberals and Democrats will help to make the economic growth issue work for conservatives and Republicans because they will assuredly trash the economy, not only through bad tax policies, but also through hare-brained energy policies that will cause energy and gas prices to soar and leave supplies unreliable, through renewed inflation, through costly regulatory burdens, and through other soft-headed fallacies. Cap and trade global warming policies will wreck the economy by imposing huge additional costs. Obama seems to think he can promote economic growth based on increased government spending. Reality will show that to be disastrously wrong.
Conservatives and Republicans should continue to advance pro-growth tax policies, such as reductions in the most damaging top marginal tax rates, and excessive corporate tax rates, as well as reduced tax burdens on savings and capital, such as reduced capital gains tax rates and expensing for business investment. These policies will not be achieved in the current political environment. But they will work politically as liberal Democrat policies fail on the economy, and voters start to look elsewhere.
The tax issue will also work politically for Republicans and conservatives, to a spectacular degree, the minute Democrats try to raise taxes on anyone earning less than $250,000, breaking the central Obama campaign promise. Be prepared for a grassroots firestorm as soon as that happens.
Moreover, conservatives and Republicans should advance other pro-growth economic policies, such as increased energy and gas production to provide reliable supplies at lower prices, anti-inflation monetary policies, and reductions in runaway government spending. These pro-growth policies together will be central in restoring political success.
Conservative Income Redistribution?
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (22) | Leave a comment
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Obama Rules| 11.19.08 @ 9:36AM
Socialism? Redistribution of wealth? That's what most of you nutjob Republicans talk about when referring to Sen. Barack Obama's plans to raise taxes on the wealthiest Americans by 3 percent, from 36 percent to 39 percent.
What country do you think you live in? America's tax laws are highly progressive. Top wage earners already pay a higher share than most of us. But this nonsense about a trickle-down effect obviously hasn't worked for EIGHT LONG YEARS. The economy needs to be fueled by the middle class, meaning people who make less than a quarter of a million dollars. Anyone making $250,000 a year won't be affected a puny 3 percent increase in taxes.
It is amazing how you guys voted Bush into office twice, then proceeded in supporting McCain in the presidential race, who ran on a platform of "I am not Bush!" So, were you finally admitting that Bush has been wrong for this country all this time? Why would anyone think that McSame would have been any better? Luckily, with Obama winning the election, we have now rounded the corner and things are looking up. But, make no mistake, we have a long way to go in fixing the mistakes of the Bush administration.
I also think it's very amusing how Republicans have traditionally harped about "taking responsibility for your own actions and life," yet over the course of eight years, Bush has never taken any responsibility for the missing WMDs, the bogus Iraqi "war on terror," the financial crisis, nothing.
All Dubya did over the course of his eight-year reign was vacation in Crawford, Texas—more so than any other president before him.
One last note on socialism: It appears Gov. Sarah Palin sure loved being the ultimate socialist: She didn't like spending her own money on a wardrobe, but sure as hell had nothing against spending $150,000 of somebody else's money. Pure socialism. She excelled at it.
I ask all you GOP supporters to please move out of the Real America once Obama takes office on Jan. 20, 2009. Problem is, who will have you?
Rick Barton| 11.19.08 @ 10:13AM
To Obama Rules:
Congrats on your side's win. McCain was no prize for our side, that's for sure. But don't knock him too hard, as I am sure he will sell us out, as he has always done, and become President Obama's puppet.
OR, what do you think of BHO wanting to bail out the big 3 car makers. Did you see on ABC that they took their private jets to DC to beg for our tax dollars.
As for leaving the Real America, I'll be catching Pacific sailfish off Costa Rica soon.
Grissie| 11.19.08 @ 10:32AM
My My My..... another Obama rhetoric graduate. Amazing they're everywhere. Especially the ridiculous flack over 150,000 for clothes. That Sarah Palin made no request for. What the Republican Party chooses to do with their funds is their business. Who cares ? 150,00 was chump change compared to the idioocy of the millions spent to perpetrate voter registration fraud by ACORN. Lets not mention the 800,000 paid by the Obama campaign to ACORN then listed as stage and lightening exspence blah, blah, blah, oopsy it was a clerical accounting error. Make that error on your tax return and see where it gets you ? Dirtiest campaign in history. Right down to the renig on Public financing.
The Obama-fanatics got what they asked for. Now live with it. No excuses. Personally, I will take every measure at the advise of my accountant pertaining to my small business. At the first sign of Obama-nomics threatening to take me by the throat, my successful race horse stable will be a 25 horse stable to 5 horses from which it originally came. Three caretakers with health insurance amongst the rest of the unemployed. Not pretty, don't like it a bit, but it becomes a complete matter of more of the same tax and spend PROGRESSIVE Democratic BS. And by the way my business prospered under George Bush. I doubt seriously I'll be able to say the same in the next four years.
Jeff| 11.19.08 @ 10:45AM
Just a 3% tax increase? What about the tax cuts that will expire in 2 or 3 years and the eradication of the FICA limit? No, it's not 3 cents on the dollar but more like 20 cents for the self-employed. But don't worry, the nanny state will use the money wisely. Ignorance is an expensive commodity and unfortunately this country abounds in it. Don't you remember the luxury tax on yachts that was suppose to penalize the wealthy? Who did it hurt? The middle class because the wealthy stopped buying and the boatyards laid off their workers. In the 80s, England instituted a tax on the wealthy and billions of pounds (money that could have been used to create jobs) left the country.
dgdc| 11.19.08 @ 10:54AM
Bush might have gotten more credit for tax cuts if more substantial reductions had been targeted at the lower earners and done so first. A 2% reductions for the middle couple tiers and 4% for the top won't get you much credit from the more numerous mid level earners. As the author suggested cut the middle rates by 5 or 10%, something that they will notice, but do it before you start working for the fattest cats. It's a matter of prioritizing
Jeff W.| 11.19.08 @ 12:09PM
Hey Obama Rules:
If the last 8 years was so bad, please explain to me how your man Obama became a millionaire in that same time period? Quit preaching the same old talking points and present some facts to back up your outrageous drivel.
Paul| 11.19.08 @ 1:12PM
How many times must we explain to pin head liberals that low wage earners don't get or deserve a tax break on income taxes because they don't pay anything now. A "tax break" is secret liberal code talk for socialist style transfer of money from one citizen to another via the government. I call it stealing. If you want to raise taxes on "the rich" [now there is a term almost as loose as "the poor"], I got it, it is called revenge, or anger, or envy. Just don't pass the money to other citizens. Spend it on National Parks, or some stupid jobs program or some other wasteful Democrat idea--just don't give it to someone who didn't earn it.
John| 11.19.08 @ 1:51PM
Paul, did you even read the article? The Earned Income Tax Credit does exactly what you state - it gives tax refunds to those that owe no federal income tax, even though they do pay payroll taxes (FICA/Medicare), property taxes and sales taxes. It is an anti-poverty measure passed by Gerald Ford in 1975 and has been increased by every republican president since. Its the main argument the republicans have for opposing increases to the minimum wage as it seems to be more effective in reducing poverty. Reagan called it the "greatest anti-poverty, pro-family measure ever passed by congress". Now Obama wants to increase it just as Reagan, Bush 41 and Bush 43 have done, and because of this he's a socialist? It makes no sense.
Everyone is opposed to welfare. We agree on that. So how best to incent the very poor to work if the jobs they can get won't even lift them above the poverty line? The republicans' answer has been the EITC. And by all measures its been a very successful program. But because its based on real dollars and not percentages it doesn't keep pace with inflation. So most prior administrations have increased it. The article states that the cost of this tax credit in lost revenue is 3.8% of the total $2.5 trillion in receipts by the federal gov't. I'm not sure I agree with that figure (I think its lower), but either way is an additional 3.8% in tax revenue worth sending millions of working parents back into poverty?
Its a healthy and useful debate for us to have, but the idea of giving refundable tax credits to low income families is nothing new and certainly not worthy of the rage that has resulted from the way this has been characterized during the election.
Jeff| 11.19.08 @ 1:57PM
Info on the history of the Earned Income Tax Credit can be found here:
http://en.wikipedia.org/wiki/Earned_Income_Tax_Credit
Grissie| 11.19.08 @ 1:57PM
Jeff W:
"More Drivel" Love it. Liberal Drivel, theres been enough of that in the last year to last a life time.
I'm sure with this Auto Bailout, Union Jive we're about to get lambasted again. Short reprieve until the " Crowned One" attends to the Union support payback.
AM| 11.19.08 @ 2:02PM
Obama Rules seems to forget or not know that number 2 of the 10 planks of the Communist Manifesto is a heavy progressive or graduated income tax.
btenney| 11.19.08 @ 3:07PM
All taxes no matter who they are levied on , are ultimately paid at the checkout counter.
All taxes are added to the final cost of all Goods and Services. More taxes, less groceries in the bag , less Gasoline in the tank.
Kind of like a flat tax. Spend more, pay more.
no to obama-bin-biden| 11.19.08 @ 4:37PM
I don't remeber McCain being all 'Im not Bush' , from what i remeber, it was Obama. "Vote for me becuase I'm not him and becuase im black." That was Obama's campaign
MDM| 11.19.08 @ 5:10PM
To Obama Rules:
Going from 36% to 39% is an 8.3% increase, not a "puny" 3% increase. Perhaps that seems like a trivial point to you, as I assume it's not coming out of your pocket. However, mathematical illiteracy is part of the problem in having a meaningful tax debate.
Dennis Lukas| 11.19.08 @ 10:30PM
Palin spent $150,000.00. Obama spent ONE BILLION PLUS on his campaign, tell the american poor how he is going to help them into higher paying food stamp programs.
Bob| 11.20.08 @ 10:45AM
Unfortunately, Ferrara makes the common error of using the parochial income tax argument rather than the more realistic argument of total taxation. My bank account does not care if the taxes I pay are federal income taxes, state income taxes, FICA, medicare, real estate taxes, sales taxes. FICA, medicare, real estate, and sales taxes are regressive. (One could argue about real estate but generally deductions available to the wealthy make this slightly regressive.) It is this total tax burden as a percentage of income that we should be comparing. If we do, the income tax argument above falls apart. Republicans concentrate on income tax only since adding the more regressive taxes hurts that argument. Democrats, on the other hand, concentrate on the loss of disposable income (a total taxation argument), which overstates their opinion. Neither Republicans or Democrats want a true and complete view of taxation since they both have agendas that depend on who is paying their salaries.
From what I have been able to gather, the purchasing power of the middle class has been declining during this century. The real question about income tax policy is not what the author above indicates, but should be part of a total taxation calculation.
Personally, I think we need to reduce TOTAL taxation for everyone. You can do this through policies of fiscal discipline and limited government. From a tax policy perspective, in order to be truly fair, I would like to see one overall non-progressive flat tax that includes ALL taxes with the exception of state taxes and real estate taxes maintaining deductions only for dependents, primary real estate, medical, and education expenses. Get rid of regressive taxation from FICA and medicare as we really don't have "trust funds" anyway, and also get rid of the capital gains tax since there is little evidence that "trickle down" actually works.
This would have the positive impact of simplifying the tax code and reducing legal expenses. To put a perspective on our total taxation, here is a chart to review:
http://www.nationmaster.com/graph/tax_tot_tax_as_of_gdp-taxation-total-as-of-gdp
Furthermore, I'd like to force the government to do a proper analysis of the total tax burden so that we, as voters, can receive unbiased data since both sides bias their analyses significantly realizing that the mathematics/econometric capability of the public is quite limited.
Jim C| 11.20.08 @ 5:32PM
Obama Rules is a moron. The "consumer credit crisis" is a name given to our current ecomomic situation by the liberal MSM to avoid placing blame on the real culprits...the Democrats. They forced banks into giving mortgages to people who couldn't afford them, while accepting political contributions from the lenders. Allowing more people to buy houses caused housing prices to artificially inflate. When the balloon burst, it first hit the housing market, then the banks. And when the price of oil rose to $140 a barrel, everyone stopped spending.
So is this the result of failed economic polices of the past 8 years? As I remember, Bush inheritted a recession and was immediately thrown into a war...and the economy grew because of the tax cuts Bush implemented. In 2005, were you crying about the past 5 years of failed economic policies?
Trickle up economics is a rediculous idea. This the land of opportunity, yet Obama wants to punish those who opportunistic.
Immigrants who founded this country and came over in the 1800's and 1900's weren't looking for handouts...they were seeking opportunity. They still are. No one is flocking to Russia or other Communist/Socialists states so they participate in spreading the wealth. The want the opportunity to create and keep their own wealth.
We may make jokes (Biden) about Indians and other forigners owning 7-11's, Dunkin Donuts, and gas stations. We may talk about Mexicans and their landscaping jobs. But you know what? They came to the US to work and make a living and they're taking advantage of the opportunity, not looking for a handout. This country wouldn't survive without them...they are a part of the USA. They're not looking to have what the other guy has. They're looking to do the best they can for their familes.
Every man is created equal and deserves equal opportunity. This doesn't mean we should all have equal results or equal success.
Daphne Kenward| 11.20.08 @ 8:55PM
It's unfortunate that many of you think Obama Rules, Obama ruels absolutely nothing. He can rule DC he has no control outside that patch. And inside that patch he is governed and Rule by the British. So I am afraid many Americans hate he because, they think I don't know what I am talking about but sorry folks I do.
THe truth is most of us poor folks would be better getting paid and make sure you leave nothing in the Bank, do not join the Army and say F..K the flag it's a worthless bith of cloth. What counts is what money you have befor the Banks steal you ut of house and home. Everybody in America should stop paying their mortgage, don't pay a dam thing bring down the system and set up the Peoples Bank of America Print your own currency. Obama is about as good a Bush with two heads.
Ms. Know| 12.4.08 @ 7:33PM
Obama and all the liberal illuminati are changing the amounts for these tax breaks, and it will get worse.