This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published July 19, 2012 on Forbes.com.
When he was asking for our vote in 2008, then candidate Barack Obama famously promised the American people, “I can make a firm pledge. Under my plan no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” But as the Supreme Court has now authoritatively ruled, the Obamacare individual mandate, requiring workers to purchase the health insurance the government specifies each family must buy, is a tax. And that tax applies to the middle class and working people.
CBO estimates that health insurance will cost $15,000 per year on average for families soon after Obamacare is fully implemented, rising rapidly from there. That is the individual mandate tax on the middle class and working people.
Of course, Obamacare includes a whole new entitlement program (just what we need) providing health insurance welfare for families making up to $88,000 a year to start, rising to over $100,000 a year after a few years. With that welfare, the net cost to families at different income levels is limited to 2 percent of income for people at 133 percent of poverty up to 9.8 percent of income for people at 400 percent of poverty. But that in itself is still like a new payroll tax, or income tax surcharge.
Moreover, taxpayers pay for the health insurance welfare as well. So the entire cost of the individual mandate tax is still $15,000 per year for families to start, and rising rapidly. That adds up to the largest tax increase on the middle class in world history.
On July 9, President Obama proposed to extend for one year the Bush tax cuts for the middle class, defined as singles making less than $200,000 per year, and couples making less than $250,000 per year, but to let the tax cuts for those earning above those thresholds expire now. A caller to a national radio show recently said the proposal meant Obama was looking out for the middle class. But if Obama is looking out for the middle class, why is he proposing to extend their Bush tax cuts for only one year? This is the first time Obama is implying that maybe the Bush tax cuts for the middle class may not become permanent either.
And then who passed those middle class tax cuts in the first place that Obama is proposing to extend? That would be President Bush and the then Congressional majority Republicans, with almost every Democrat opposing the relief. But Obama and his Che Guevara Democrats have been telling us for 4 years that Bush and the Republicans only cut taxes for the rich. Even according to CBO, the Bush middle class tax cuts Obama wants to extend dwarf the Bush tax cuts for “the rich” Obama does not want to extend.
Obama elaborated on July 9, “We need policies that grow and strengthen the middle class – policies that help create jobs, …that encourage businesses to start up and create jobs right here in the United States.” But the Obama policies already enacted under current law would raise the top tax rates on Jan. 1 for almost every federal tax for the nation’s job creators, investors and small businesses, with the expiration of the Bush tax cuts and the Obamacare tax increases becoming effective.
As a result, the top two income tax rates would increase by nearly 20%, the capital gains tax rate would increase nearly 60%, the tax on dividends would nearly triple, the Medicare payroll tax rate would increase by 62% for these disfavored taxpayers, and the death tax rate would rise from the grave with a 57% increase in the top rate.
This would all be on top of the highest corporate income tax rate in the industrialized world at nearly 40% when state taxes are counted. That leaves American businesses uncompetitive in the global economy. Yet under Obama, there is no relief in sight. Instead he has spent the past two years barnstorming the country for still more tax increases. His proposed Buffet Rule would increase the current capital gains tax rate by 100%, leaving America saddled with the fourth highest cap gains rate in the industrialized world.
As the Wall Street Journal explained on July 10, what “Mr. Obama is demanding [are] tax increases, not tax cuts, and large increases at that.” How do those tax increases strengthen the middle class, and encourage businesses to start up and create jobs right here in the United States? They do just the opposite. Obama’s rhetoric is just more Calculated Deception, designed to fool the gullible.
By sharp contrast, the Republican House majority has already passed the permanent extension of the Bush tax cuts for everyone. That includes the middle class tax cuts that the Republicans originally enacted that Obama proposes to extend for only one year, as well as the Bush tax cuts for the nation’s job creators, investors, and small businesses. So who is really looking out for the middle class?
It is the middle class and working people that will be hurt the most by Obama’s comprehensive tax rate increases already enacted into current law. Those steep rate increases will slash incentives for the capital investment essential to creating new jobs and increasing wages. If those tax rate increases push the weak economy back into recession next year, as I and many others have predicted, the unemployment rate will soar back into double digits, and wages and income will decline further. Poverty will accelerate to new all-time records. How does that strengthen the middle class?
Obama contends that his tax rate increases would only affect 3% of small businesses. While that figure is in dispute, more important is that the tax rate increases would affect two-thirds of small business income, and the jobs and wage increases that income supports.
Obama continued on July 9 with this outdated talking point, “So I’m not proposing anything radical here. I just believe that anybody making over $250,000 a year should go back to the income tax rates we were paying under Clinton….” But the capital gains tax rate Obama is proposing is 50% higher than under Clinton. The tax on corporate dividends is 10% higher. The top income tax rate is 27% higher.
As the Journal also observed on July 10, “As for the impact on growth, even Keynesian theory holds that raising taxes should be avoided in a weak economy. That’s the argument that Mr. Obama used in late 2010 when he agreed with Republicans to extend the Bush tax rates through the end of 2012.” But Obama displayed a lot of confusion on July 9, when he also said, “these tax cuts for the wealthiest Americans are also the tax cuts that are least likely to promote growth.” That reflects his own confessed Marxist upbringing and philosophy holding that spending on consumption somehow does more to promote growth than spending on investment, when in the real world the opposite is true. That confused thinking is more generally held throughout today’s Che Geuvara Democrat Party.
But Obama continued on July 9 to reflect ignorance or dishonesty in saying, “Moreover, we’ve tried it their way. It didn’t work. At the beginning of the last decade, Congress passed trillions of dollars in tax cuts that benefited the wealthiest Americans more than anybody else. And what happened?”
We already discussed above that more revenues were lost on the tax cuts that Obama says he wants to keep than on the tax cuts for the “rich” that he doesn’t. But what did happen with the tax cuts for job creators, investors and small businesses that Obama doesn’t want to keep?
After those rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs over the next 4 years and the unemployment rate fell from over 6% to 4.4%. Real economic growth over the next 3 years doubled from the average for the prior 3 years, to 3.5%.
In response to the rate cuts, business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. That is where the jobs came from. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled. Capital gains tax revenues had doubled by 2005, despite the 25% rate cut!
Perhaps knowing that this rationale for his position was not valid, Obama offered another justification on July 9 for his comprehensive tax rate increases, saying, “But we’ve got this huge deficit, and everybody agrees that we need to do something about these deficits and those debts.” The problem is that his dramatic tax rate increases will do little if anything to reduce the deficit. In fact, they may well make the deficit worse.
As reflected by the Bush experience discussed above, over the last 45 years, every time the capital gains tax rate has been raised, capital gains revenues have declined rather than increased. And every time the cap gains tax rate has been cut, revenues have increased rather than declined. Obama’s nearly 60% increase in cap gains tax rates will produce the same result.
Moreover, after the Bush tax rate cut for dividends, corporate dividend payouts soared, increasing rather than reducing revenues again. If the dividend tax rate is now increased by nearly 3 times, dividend payouts will collapse to their previous levels, and revenues from their taxation will decline as well.
Don’t tell me about the CBO or Joint Tax Committee score of the Obama tax rate increases, because these august authorities failed to predict accurately all the prior history discussed above. In 1997, when Congress was considering a cut in the capital gains rate from 28% back down to 20%, CBO estimated that revenues would decline as a result, for a net revenue loss of $21 billion over the next 10 years. The actual numbers after the tax cut was passed showed an increase of $84 billion over the pre-tax cut projections for 1997 to 2000. Despite an almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999.
When Congress considered the Bush capital gains rate cut in 2003, from 20% to 15%, CBO estimated that this would cause a revenue loss of $5.4 billion from 2003 to 2006. But after Congress passed the tax cut, capital gains revenues increased by $133 billion during those years, as compared to the pre-tax cut projections. As Dan Clifton of the American Shareholders Association said, “There is no excuse for this $138 billion error.” Capital gains tax revenue doubled from 2003 to 2005 despite a 25% cut in the tax rate.
If all these comprehensive Obama tax rate increases for 2013 push the weak economy back into recession, federal revenues overall will decline rather than increase, and the deficit will rocket to new all time records over $2 trillion. Because of the Obama tax rate increases, Art Laffer and Ford Scudder write in Monday’s Wall Street Journal, “it is a certainty that we face a lower level of output in 2013.” Declining output means recession. Indeed, because the Obama tax increases are 50% greater as a percent of GDP than the Reagan tax cuts, Laffer and Scudder write, “Mr. Obama’s tax increases will do more to harm the economy than Reagan’s tax cuts helped the economy.” That is not fighting for the middle class, that is trashing the middle class.