Like Dorothy in the Wizard of Oz, we’re not in Kansas anymore. That is, if Kansas is defined as the 1990s Internet boom. But Barack Obama has constructed an odd time machine to take us back: returning to the Seinfeld decade’s top two income tax rates in exchange for keeping the rest of the Bush tax cuts.
President Obama called on Congress to pass a one-year extension of those tax cuts, with the exception of letting the 35 percent marginal rate rise to 39.6 percent and the 33 percent rate jump to 36 percent. That will deliver a tax increase on individuals making more than $200,000 and families earning over $250,000 while ostensibly protecting everyone else from tax hikes.
The planted axiom is that the good times rolled under those tax rates during the ’90s, so returning to them shouldn’t hurt economic growth. After all, Obama reminds us, we simply revert back to what “we were paying under Bill Clinton.”
Except the additional 0.9 percent payroll tax imposed under Obamacare and the 2.9 percent surchage on investment income would actually make marginal tax rates a bit higher than under Clinton. We didn’t have an individual mandate, backed by a penalty the Supreme Court has pronounced a tax, during Slick Willie’s tenure either.
But note that Obama doesn’t think it would be good for the economy to go back to the Clinton-era bottom tax rate of 15 percent from the post-Bush rate of 10 percent. Only raising the top rates will help. “By the way, these tax cuts for the wealthiest Americans are also the tax cuts that are least likely to promote growth,” he said Monday.
Savings and investment don’t do anything to promote growth? This kind of raw Keynesianism holds that burying canisters at the beach is a good way to create shovel-ready jobs and that the broken window fallacy is a truism. Raw politics is likely the bigger consideration: several polls have shown more than 60 percent of the American people — including a majority of self-described Republicans — in favor of tax increases on the wealthy.
Yet those same polls show the public understands such tax hikes won’t do much good. According to a Washington Post/ABC News survey last year, only 4 percent thought raising taxes was the best way to deal with the deficit. Eight times as many — 32 percent — preferred spending cuts. And if Obama was serious about deficit reduction, why not get the larger amount of revenue theoretically available from letting all the Bush tax cuts lapse?
Obama dismisses the idea that his proposed tax hike would hit small businesses that report their income under the individual tax rates such as sole proprietors and subchapter S corporations, saying that only 3 percent of small business owners would be affected. But the top 3 percent hire the most workers. The Joint Tax Committee estimates that roughly 940,000 taxpayers would get hit — a large number of potential employers when the economy is only adding 80,000 jobs a month.
Between 1993 and 2009, nearly two-thirds of net new jobs were created by small businesses. Obama’s tax increase would ensnare 53 percent of net business income. Americans for Tax Reform estimates that a majority of small business profits and more than a third of sole proprietor profits would face higher taxes.
Moreover, the original Clinton tax increases were enacted while the economy was already growing. The recession that ended George Bush’s presidency had been over since March 1991. Initially, they probably slowed the growth somewhat. By one estimate, the “Clinton crunch” resulted in 1.2 million fewer jobs being created than if tax rates had remained the same.
This tax increase would come during a weak economic recovery, with GDP growing at just a 2 percent rate. Unemployment has been over 8 percent for 41 consecutive months, something the country hadn’t seen in over ten years when the original Clinton tax increase became law. This economy, barely out of the Great Recession, is not as capable of withstanding tax hikes.
Clinton agreed to cut capital gains taxes, reducing them to 20 percent before they were knocked down to 15 percent in 2003. Obama seeks to raise them. Under his proposal, the capital gains tax rate would climb to nearly 24 percent and dividends would be taxed at 45 percent.
So no, Obama isn’t exactly bringing back the Clinton-era tax rates. His tax increases aren’t going to bring back that era’s growth either.
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