Obama Moves In Right Direction On Taxes
Lo and behold, Team Obama is moving toward the supply side and pivoting toward the political center on key aspects of its tax policy.
Writing in Thursday's Wall Street Journal, Obama advisers Jason Furman and Austan Goolsbee outlined a plan that would raise tax rates on capital gains and dividends only from 15% to 20% for individuals making more than $200,000 and on family incomes above $250,000.
Before this, investors worried that Barack Obama would double the 15% tax rate on cap gains and bring the 15% rate on dividends back to 40%.
Can investors take some relief from this? I reckon they can. And key Obama advisers say these investment tax rates will be consistent with the economic and stock-market boom of the 1990s. That's their trump card in all this.
Well, OK. But in 1997, the capital-gains tax was cut from 28% to 20%. That provided an 11% increase in retained income for the extra dollar put at risk by investors. In 2003, President Bush reduced the cap-gain levy to 15%, providing an additional 6% incentive.
With Sen. Obama's 20% rate on investment, investors would suffer a 6% incentive loss on their cap-gain incomes and a 5.5% incentive drop on dividends.
The cost of capital would rise under Obama, and investment returns would decline by 11%. Uncle Sam will keep more and investors will retain less, all while the economy is languishing.
The McCain folks say a weak economy is no time to raise taxes. It's a strong point, isn't it? Former Treasury Undersecretary John Taylor, a senior McCain adviser, notes that raising investment taxes will undermine business and lessen job creation, which is the ultimate source of consumer incomes and spending power.
The Obama people counter that their middle-class tax credit of $1,000 per family is much more powerful than John McCain's plan to double the child exemption.
Furman and Goolsbee argue that McCain's larger dependent exemption skips 101 million families with no children or dependents.
But tax credits are an inefficient source of stimulus because of various income thresholds that determine eligibility. Phasing in these credits provides temporary relief. Phasing them out as earners gain higher incomes raises marginal tax rates and provides a work disincentive for the extra dollar earned.
Another glitch in the Obama plan is the difference between the $200,000 income limit for individuals and the $250,000 threshold for two-earner families.
If two singles each earning $200,000 get married, one will have to surrender over half of what he or she earns to the government.
And raising the top income-tax rate from 35% to 39.6% is a work deterrent of roughly 7%. The extra dollar earned leaves only 60.4 cents take-home pay at the 39.6% tax rate compared with 65 cents at the current 35% rate.
At the margin, this work disincentive can really matter.
Nonetheless, it appears the Obama people acknowledge at least some effects from supply-side incentives.
And perhaps they are implicitly recognizing the likelihood that higher tax rates on cap-gains and dividends will generate lower revenues and a higher budget deficit.
It also seems clear that the Obama tax plan is not a growth policy, but a social policy that uses tax fairness as a means of redistributing income.
There's a long history of failed redistributionism, and this is where the Obama plan falls apart.
Plus, the world has changed since the 1990s.
The flat-tax revolution coming out of Eastern Europe has slashed marginal rates on individuals and corporations, resulting in strong growth and big revenue gains that keep budget deficits down.
Sen. McCain's plan to maintain the Bush tax cuts and move toward a lower corporate tax rate will leave the U.S. in a much more competitive position in the global race for capital and labor.
But I still believe the best tax reform is a flat tax that would end the multiple tax on saving and investment by doing away with taxes on capital gains, dividends and estates.
Corporate tax rates also should be slashed, and all forms of corporate welfare, subsidies and loopholes should be eliminated. This would put K Street lobbyists out of business and put tremendous torque behind our future economy.
But Team Obama's small shift toward the supply side remains a positive development.
The McCain folks are now slamming Obama's credibility on tax hikes and other issues. They imply that the young Illinois senator is a flip-flopper.
Well, that's true. But some flip-flops are better than others.
McCain flip-flopped on the Bush tax cuts and drilling. Bravo for that.
And if Obama is flip-flopping toward lower investment taxes, so much the better.
The Good and Bad of Obama's Tax Plan
By John Tamny“We are all blessed by the genius of relatively few.” – Warren Brookes, The Economy In Mind
Barack Obama’s top economic advisors, Jason Furman and Austan Goolsbee, summarized the main points of his tax plan last week in the Wall Street Journal. Most notably, rates of taxation on middle-class incomes will fall if his program passes, while federal rates on income and capital gains for top earners will return to levels last seen in the 1990s.
While Obama’s tax plan is mistaken, on its face it should not be seen in an apocalyptic light. In merely seeking a return to the taxation levels of the ‘90s, Obama is implicitly acknowledging that tax rates matter. While tax rates were too high in the ‘90s and they’re too high now, the ‘90s levels were relatively low when compared to the success penalties imposed by other 20th century U.S. presidents, and the economy grew.In the above sense Obama is making plain that “we’re all Reaganites now.” Nowhere in his plan does he say we should return to the confiscatory rates weathered under Nixon, Ford and Carter in the ‘70s, or for that matter rates experienced under Ronald Reagan up until 1986. Reagan’s ideas about incentives and taxation seem to have positively infected both political parties to varying degrees, and this means there’s reason for moderate optimism no matter who wins in November.
Still, Obama’s tax plan is unfortunate because it flies in the face of his own objectives. Indeed, as Furman and Goolsbee noted, “Sen. Obama believes that one of the principle problems facing the economy today is the lack of discretionary income for middle-class wage earners.”
But if that’s the case, Obama won’t help the middle class by penalizing the wealthy. This is so because wages can only rise when the amount of available investment capital increases. Simply put, without capital there are no wages.
So while Furman and Goolsbee argue that “Obama’s middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000,” they misunderstand the origin of middle-class comfort. In short, a 10% rate cut on income of $250,000 and up frees up far more capital than a tax cut on income of $50,000.
And that’s why it’s so essential to keep the rate of taxation on high earners as low as possible, perhaps the lowest rate of them all. From a revenue standpoint it’s empirically true that top earners footed a much greater portion of federal revenues in the 1920s, ‘60s and ‘80s despite a reduction in top rates, but more important is the impact on wages for those not wealthy.
Sure enough, logic tells us that if top earners are penalized less, they can either consume non-taxed income or they can save. If they consume we should consider their spending a non-Washington form of “stimulus” whereby the rich transfer wealth to workers through the purchase of life’s necessities and frivolities.
Even better, however, is what happens if the rich choose to save and invest the income that the government doesn’t confiscate. Invariably, money saved is lent to businesses and entrepreneurs reliant on capital in order to grow. For the middle class this is a big deal because the savings either fund new forms of employment, or additional remuneration. When Obama’s concerns about discretionary income are considered, the single best way to increase middle-class income is to reduce the success penalty on those in possession of the greatest amount of capital. That is the rich.
The above in mind, Furman and Goolsbee oddly maintain that the tax-rate cuts advocated by McCain “would take money from the middle class,” but as economic logic dictates, their assumptions are backwards. Any legislation that expands the dollar amount of non-taxed capital will automatically accrue to middle-class earnings. In short, don’t be fooled by candidates who say they’ll help the poor and middle class by taxing the rich. When politicians say the latter, what they’re really saying is that they’ll reduce the earnings of all those not yet rich.
And when we consider the blessings we all receive from the vital few who start businesses, it’s essential to remember that many of tomorrow’s corporate behemoths are presently small. According to Furman and Goolsbee, the “vast majority of small businesses would face lower taxes” under Obama’s plan, but this is deceptive. More realistically, many small businesses pay individual rates of taxation on profits, so while the Obama tax plan allegedly favors them, the reality is that an increase in the top tax rate will harm the very firms that Obama seeks to elevate.
Even worse, when Obama contradicts his alleged like of small business with proposals of higher taxes for same, he shows an impressive ignorance of how hard it is to make what is small, large. Indeed, the “seen” in the U.S. economy is the various economic success stories such as Microsoft and Google. What’s unseen is how many small businesses over the years have ceased to exist. With many reliant on the smallest of earnings margins to stay in operation, higher individual rates of taxation could constitute what is often the slight difference between success and failure.
The late Warren Brookes once noted that envy “is the single most impoverishing attitude of thought.” While the Obama tax plan in no way heralds future bread lines, it misses the point for needlessly furthering the politics of envy. Increased taxes on the rich will serve no helpful policy objective, but those taxes will weigh on the incomes of those who would one day like to be rich.
Obama Touts Single-Payer System for Health Care
Amy Chozick reports on the presidential race from Albuquerque, N.M.
Barack Obama said he would consider embracing a single-payer health-care system, beloved by liberals, as his plan for broader coverage evolves over time.
“If I were designing a system from scratch, I would probably go ahead with a single-payer system,” Obama told some 1,800 people at a town-hall style meeting on the economy.
A single-payer system would eliminate private insurance companies and put a Medicare-like system into place where the government pays all health-care bills with tax dollars.
Many liberals have long embraced the coverage plan, saying it would cover everyone, take the profit out of health insurance and allow for greater efficiencies. But Republicans cringe at such deep government involvement in the private sector, calling it socialized medicine. And many Democrats, including Obama and former rival Hillary Clinton, have taken a much more moderate approach.
Obama’s health-care plan aims for universal coverage by offering a new government-run marketplace where Americans could buy insurance, mostly from private plans. He would offer subsidies to individuals and to small business owners that offer their workers coverage. His plan also would require that parents get insurance for their kids. And he aims to lower health-care costs to make coverage more affordable. His plan includes one small step toward single payer. His new marketplace would create a new government-run plan, like Medicare, to compete against the private plans.
But Obama repeated that he rejects an immediate shift to a single-payer system. “Given that a lot of people work for insurance companies, a lot of people work for HMOs. You’ve got a whole system of institutions that have been set up,” he said at a roundtable discussion with women Monday morning after a voter asked, “Why not single payer?”
“People don’t have time to wait,” Obama said. “They need relief now. So my attitude is let’s build up the system we got, let’s make it more efficient, we may be over time—as we make the system more efficient and everybody’s covered—decide that there are other ways for us to provide care more effectively.”
Tax Vote Aims at Paterson
In an affront to Governor Paterson, Assembly Democrats are preparing to vote to raise taxes permanently on New Yorkers earning more than $1 million a year.
The so-called millionaire's tax bill would raise the personal income tax rate of people earning more than $1 million, and boost the tax rate even higher for people earning more than $5 million. The increases up for consideration are higher than had been proposed earlier this year and, unlike the previous plan, would not be restricted to a five-year period.
Critics of the plan, which is expected to win approval in the Assembly today when lawmakers return to Albany for a special legislative session called by the governor to cut hundreds of millions of dollars from the state budget, say the tax hikes would prompt wealthy New Yorkers to leave for neighboring states with lower tax rates, such as New Jersey and Connecticut. They also say it illustrates the Assembly Democrats' refusal to identify ways to significantly trim the budget.
Mr. Paterson has expressed opposition to the tax hike proposal, arguing that the state should be looking to tighten its belt in this grim economy. Mayor Bloomberg has spoken out against the plan.
Although the bill would need to win approval in the Republican Senate before it could be enacted, supporters say they are certain that even if it doesn't go through this year, the legislation would lay the groundwork for a tax increase down the road.
If Republicans lose their majority in the Senate this fall, the millionaire's tax could have a greater chance of winning approval.
"Regardless of who is in power next year, the Legislature is going to have to look at increasing taxes," said Daniel Cantor, the executive director of the Working Families Party, a labor-backed group that supports the millionaire's tax. "If the Democrats are in power, they will try to tax wealthier people. If the Senate Democrats take over, we hope they will be true to those time-honored views."
The Assembly is set to vote on the bill today at a special session Mr. Paterson called in late July, during an unusual televised address in which he tried to impress upon New Yorkers the dire condition of the state's finances and call for action from lawmakers.
He has asked the Legislature to come up with $600 million in cuts today to help close a budget gap of $6.4 billion next year, and has warned that the cuts could be "painful." Exactly where the cuts would come from was still being negotiated yesterday, an Assembly Democrat said. Mr. Paterson has called for cutbacks to health care and higher education.
Assembly Democrats also are expected to protest a property tax cap supported by the governor and the state Senate by voting today on an alternative plan that would restrict property taxes through a formula that ties tax payments to income levels, instead of approving an across-the-board property tax cap.
Known as a circuit-breaker, the property tax plan would set limits on taxes, so that a family with a gross income of $90,000 or less wouldn't have to spend more than 5% of its gross income on property taxes. The tax limit would increase to 6% for households earning between $90,000 and $125,000, and would jump to 7% for households earning $125,000 to $250,000.
"This is a responsible approach to not only dealing with the fact that we have a looming budget crisis, but giving the greatest amount of relief to those who most need it: low- and middle-income New Yorkers," Assemblyman Micah Kellner, a Democrat of Manhattan, said.
The alternative proposal would prevent the tax cap passed by the Republican-led Senate earlier this month — which would prohibit taxes from increasing by more than 4% a year — from becoming law. The Senate's measure drew an immediate rebuke from labor-backed organizations, which launched a $1.5 million advertising campaign attacking the plan and the governor.
The Assembly's millionaire's tax bill would raise the income tax rate to 7.85% from 6.85% for New Yorkers who earn more than $1 million a year, and would raise to 8.6% from 6.85% the tax rate for people earning more than $5 million. If enacted, it would raise $2.6 billion for the state, according to the Working Families Party.
An earlier proposal discussed in the spring would have authorized the tax increase for five years only and raised the personal income tax rate to 7.7% from 6.85%.
The director of the Empire Center for New York State Policy, E.J. McMahon, said he's not surprised that Assembly Democrats, led by Speaker Sheldon Silver, are planning to approve the millionaire's tax.
"It has been clear from the beginning and from everything the speaker has said over the past year that they are much more interested in raising taxes instead of reducing the budget," he said.
"They are going to keep consistently pressing it until they get it."
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