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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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.
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