OC Register
Friday, April 25, 2008
Missing from much of the discussion about the Democratic presidential primary campaign is what Barack Obama has said on taxes. Judging from the most-recent televised debate and campaign information, he either doesn't have a clue about the consequences of higher taxes, or he's just a mindless soldier of class warfare.
Obama has run a campaign focused on hope and change. He claims his administration would provide economic relief for the little guy who has been ignored so long in Washington. However, Obama's tax policies would do just the opposite.
If elected, Obama has stated he would push for a sizable tax increase to fund greater spending. He advocates for an increase in income taxes, capital-gains taxes and corporate taxes. These tax hikes would seriously harm the economy and provide only modest revenue gains.
In contrast, John McCain has indicated his support for extending the Bush income tax cuts. McCain's plan includes reducing the corporate income tax rate to 25 percent. He wants to simplify the tax code and phase out the alternative minimum tax. These tax policies would promote growth and job creation. They would also boost wages.
The income tax cuts of 2001 and 2003 are scheduled to end in 2010. If this is allowed to happen, it would amount to the largest income tax increase in the post-World War II period. Obama is OK with this increase for individuals earning more than $200,000 a year, while McCain wants the lower tax rates to be maintained.
Obama is so blinded by a class-warfare view of the economy that he misses the fact that the income of small and medium-size businesses (proprietorships, partnerships and limited shareholder companies) are subject to taxation under the income tax, not the corporate tax. His income tax increase would hit these businesses hard.
Cutting the income tax can work much like reducing the corporate tax to encourage economic activity and job creation. Researchers have found that smaller businesses, like corporations, respond to lower income tax rates by expanding employment and paying higher wages. Higher income tax rates will reduce employment and wages, harming the middle class.
Obama said during last week's televised debate in Pennsylvania that he is willing to nearly double the capital-gains tax rate from the current 15 percent to 28 percent. McCain wants to hold it at the current 15 percent rate.
Obama wants a higher capital-gains tax rate to punish high-paid managers of hedge funds. While hedge fund managers might pay more, so would the other 100 million owners of stocks. According to IRS data, 80 percent of recent tax returns that declared capital-gains were from households with income less than $100,000. Once again, Obama's tax polices would hurt the small investor.
As other countries cut corporate taxes, the United States' 39.3 percent corporate tax rate is the second-highest in the industrialized world. Obama wants to tax corporations more while McCain wants to cut the rate to 25 percent.
Obama's logic is that corporations that are shifting jobs overseas don't deserve tax breaks. What he fails to understand is that the high U.S. corporate tax rate is an important cause of corporate efforts to relocate production outside the United States.
High corporate taxes are troubling for three reasons. They reduce the incentive for American businesses to invest at home. High tax rates make it harder for American business to compete on global markets. Finally, economists Kevin Hassett and Aparna Mathur of the American Enterprise Institute in Washington find that for every 1 percent increase in the corporate tax rate, manufacturing wages decline by 0.8 percent.
These results are not surprising. High corporate taxes reduce investment in plant and equipment, lowering worker productivity and wages. A high corporate tax rate is not good for labor; it lowers wages and reduces job opportunities. Once again, Obama's tax policy would hurt the middle class by destroying jobs and slowing wage growth.
McCain once said he understands foreign affairs and defense policy better than economic policy. Judging from a comparison of his tax proposals with his likely opponent, Obama, he was far too hard on himself. With the economy possibly in recession, the last thing we need is a massive tax increase. While Obama sells himself as the candidate with policies to help the middle class, his tax proposals would do just the opposite. Ironically, it is Republican John McCain whose policies would help middle-class Americans.