The Public Policy

Is This What Our Economy Needs?

In the face of recession, Hillary and Obama's tax-and-spend proposals are sure to depress the U.S. still further.

By 3.6.08

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Barack Obama and Hillary Clinton are both campaigning on economic policy platforms promising enormous, unprecedented, historic increases in runaway government spending, to be financed with huge, record setting, historic tax increases. Is this what our economy needs, just when it may be tipping into recession, and facing the stiffest world competition in decades?

All projections show that America can't afford all the entitlement promises we have already made, with current programs causing federal spending to explode over the next 30 years from 20% of GDP today to close to 40%. Foolishly and irresponsibly, the twins just propose still more entitlements.

Hillary Clinton has emphasized federally funded, universal, pre-K, meaning a new entitlement to federal nursery schools. Obama has indicated support for that as well. Just last month, Obama proposed "a tax credit to low and middle income Americans that would cover ten percent of their mortgage interest payment every year." That is effectively a new entitlement enshrined in the tax code

Both Hillary and Obama, of course, support the biggest new entitlement of all -- national health insurance. I thought this campaign was supposed to be about hope and the future. But there is no idea more hopelessly tried and failed than national health insurance. All these systems begin by promising low cost health care for everyone, and end with rationing bureaucracies organized to deny care to control overwhelming costs.

But Hillary and Barack just go on and on competing to see who can dredge up the most hoary, failed ideas from the 1960s, or even the 1930s. The only rule in the Democrat contest -- no one can think or say anything that wasn't already outdated and discredited by the 1970s.

SO THEY BOTH NOW SUPPORT $60 billion over 10 years in additional, wasteful, unnecessary spending on a National Infrastructure Reinvestment Bank, which will pay for more construction and repair of highways, bridges and other infrastructure. No ray of new thought here. The last federal highway bill approached $300 billion for doing the same thing. The proposed budget for the Army Corps of Engineers for next year alone is over $10 billion, for still more of the same.

But, you know, the government just has to put people to work building stuff, as in the 1930s. Otherwise, how will those 5% unemployed ever have any hope of finding jobs?

But the pair are just warming up, government spending wise. On the Earned Income Tax Credit, a welfare benefit entitlement program implanted in the tax code, Obama said last month, "I'll double the number of workers who receive it and triple the benefit for minimum wage workers." He proposes another cash handout he calls a middle class tax cut in the form of "a new and fully refundable tax credit worth $4,000 for tuition and fees every year." That is part of an education package calling for an additional $72 billion in increased federal spending. Another $14 billion in new spending is proposed for a national service plan.

Another cash handout in the form of a tax credit will provide "up to $1000 for a working family" for "95% of working Americans." This was a new idea in 1972, when George McGovern proposed giving away $1,000 to each adult voter as a hip, new, welfare program. Obama says he proposes a middle class tax cut in the form of a series of these cash giveaways dressed up as income tax credits. But when the credit gives money to voters that they did not pay in income taxes, and there is no cut in any tax rates involved anywhere, what we are talking about is still more cash welfare, not a tax cut. Obama proposes to spend an additional $340 billion on this new tax credit welfare.

When it comes to creating new jobs, Obama looks to government again and still more spending. He proposes to spend $150 billion supposedly creating 2 million jobs building new "green technologies" for which there is apparently no market demand.

In legislation already before Congress, Obama has proposed the "Global Poverty Act", which commits U.S. taxpayers to the goal of the 2000 United Nations Millennium Summit to reduce world poverty by 2015. This includes "the elimination of extreme global poverty" and "reducing by one half the proportion of people worldwide...who live on less than $1 per day." The legislation would commit the U.S. to spending 0.7% of GDP for this goal, which would increase our foreign aid by $65 billion per year. The head of the UN's Millennium Project is calling for a new global tax to finance this new worldwide war on poverty.

Obama further proposes $60 billion in new spending for an energy plan that will produce relatively little or nothing in new energy. He also proposes to increase "assistance to state and local governments so that they don't slash critical services like health care or education." He also says, "I'll double spending on quality after school programs."

Hillary's response to this litany of big government spending programs is to accuse Obama of stealing all of her best ideas.

THESE MASSIVE SPENDING INCREASES are to be financed in part by letting the Bush tax cuts expire. Here is what happens if the Bush tax cuts expire:

-- The lowest income taxpayers will suffer a 33% increase in their income tax rate, from 10% to 15%;

-- The top marginal income tax rate will increase from 35% to 39.5%;

-- The capital gains tax will increase by 33% from 15% to 20%;

-- The tax on the dividends received by many seniors will more than double from 15% to as much as 39.5%;

-- Taxpayers with children will lose 50% of their child tax credits;

-- The federal death tax will go back up to its original level after being phased out in 2010;

-- Married taxpayers will suffer the return of the marriage penalty.

This $2 trillion tax increase is just the beginning. Both Obama and Hillary have proposed to increase taxes on corporations in the name of fairness, and further increase taxes on the wealthiest investors.

But our nation's economy is already suffering from one of the highest corporate tax rates in the world. Counting federal and state corporate income taxes, American corporations face an average top rate of 40%. The average corporate tax rate in the European Union was 24% in 2007, down from 38% in 1996. How is America to compete not only with these countries, but with the emerging giants of India and China, given this crippling tax disability?

The corporations bearing this tax burden are supposed to provide working people with jobs, better incomes, and long-term prosperity. That is not going to happen with the highest corporate tax rates in the industrialized world.

The economy is already tanking towards recession because of the specter of these ultraliberal left tax-and-spend policies. What is needed to restore economic growth, and ultimately create a long-term economic boom, is just the opposite of the policies proposed by Obama and Hillary.

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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.