President-elect Obama is letting his outline for economic recovery dribble out into the media ever so slowly. But from what we've seen, the plan seems less like stimulus and more like redistribution.
The linchpin of Obama's strategy is a tax cut for the "95%" of taxpayers who earn less than $250,000 a year. In itself, cutting taxes on the middle class isn't a bad idea. It just won't do what Obama thinks it will.
The Washington Post quotes senior Obama adviser David Axelrod as saying, "Look, we feel it's important that middle-class people get some relief now." Obama seems to believe that by lowering levies on only those in the middle ranges of the tax spectrum, he can "create or save" 3 million jobs and give the economy a boost.
Not likely.
For that, Obama would have to focus on the very unpopular but very necessary job of lowering the burden on those taxpayers who create jobs and spur economic output — the nation's entrepreneurs. And guess what? Most of them are in the top 5% of earners — those whom Obama would cut out of any tax reduction. This is foolish class warfare with no real underlying economic rationale.
If Obama is serious about getting the economy going again, he could do a number of things — and right away, not years from now, as with the $675 billion to $775 billion he plans to spend on infrastructure and imaginary "green jobs." These steps would include:
• Cutting corporate tax rates. U.S. businesses pay a top rate of 35% on income. That rises to 40% when you add in state taxes. In Europe, the average corporate tax in 2007 was 24.2%, according to the international consultancy KPMG.
Is it any wonder some of our most successful corporations move offshore? Cutting corporate taxes even to 25% would improve investment returns — and lead to more jobs and output.
• Slashing capital gains tax rates. This is a no-brainer. Every time cap-gains tax rates have been cut, a bull market has ensued not too long after and the economy has boomed. Today the cap-gains rate on long-term investments is 15%. Obama has suggested it should rise to 20%, a 33% increase. He's also suggested he might zero-out the rate for small firms and startups.
The latter would be better than nothing, but broad cuts in cap-gains rates would be best of all. They would lead to a surge in capital formation, business incorporations and millions of new jobs. A recent report from Ernst & Young found that U.S. cap-gains rates are already higher than in more than half of the world's top-performing economies. Raising them would only make us less competitive.
• Not raising taxes on the rich. This would be hard to do, given Obama's rhetoric on the stump. But those with incomes over $250,000 a year are the most likely to save and invest. And already they pay nearly 48% of all taxes, while 44 million middle- and lower-income households pay no taxes at all.
Obama has rightly called small businesses "the engines of our job creation." Well, 65% of those with incomes above $250,000 are small-business owners. According to Heritage Foundation data analyst Guinevere Nell, Obama's plans would give just 16% of small businesses a tax break. If Obama wants to help business create millions of jobs, putting a target on the backs of entrepreneurs won't help.
While he's at it, Obama should repeal the alternative minimum tax (AMT), the "millionaire's tax" that increasingly hits people not at the top incomes, but in the middle.
For the record, higher taxes on the rich is often a popular idea with newly elected presidents. Herbert Hoover liked it so much he jacked top income-tax rates from 25% in 1930 to over 60% four years later. Remember how that worked out?
• Ending the death tax. No pun intended, but this is a deadweight tax that raises little income but costs a lot. As it stands, the tax will expire in 2011 and then return in 2012 to its highest levels. This is morally indefensible and economically absurd.
The estate tax generates very little in revenues. And according to Heritage economist William Beach, it costs 170,000 to 250,000 new jobs each year. It's a loser.
Helping entrepreneurs may not be popular with many of Obama's key supporters and advisers. But they're the ones who can really stimulate the economy. If Obama wants to be more than a one-term president, he should keep them front and center in any recovery plan he unveils.
The linchpin of Obama's strategy is a tax cut for the "95%" of taxpayers who earn less than $250,000 a year. In itself, cutting taxes on the middle class isn't a bad idea. It just won't do what Obama thinks it will.
The Washington Post quotes senior Obama adviser David Axelrod as saying, "Look, we feel it's important that middle-class people get some relief now." Obama seems to believe that by lowering levies on only those in the middle ranges of the tax spectrum, he can "create or save" 3 million jobs and give the economy a boost.
Not likely.
For that, Obama would have to focus on the very unpopular but very necessary job of lowering the burden on those taxpayers who create jobs and spur economic output — the nation's entrepreneurs. And guess what? Most of them are in the top 5% of earners — those whom Obama would cut out of any tax reduction. This is foolish class warfare with no real underlying economic rationale.
If Obama is serious about getting the economy going again, he could do a number of things — and right away, not years from now, as with the $675 billion to $775 billion he plans to spend on infrastructure and imaginary "green jobs." These steps would include:
• Cutting corporate tax rates. U.S. businesses pay a top rate of 35% on income. That rises to 40% when you add in state taxes. In Europe, the average corporate tax in 2007 was 24.2%, according to the international consultancy KPMG.
Is it any wonder some of our most successful corporations move offshore? Cutting corporate taxes even to 25% would improve investment returns — and lead to more jobs and output.
• Slashing capital gains tax rates. This is a no-brainer. Every time cap-gains tax rates have been cut, a bull market has ensued not too long after and the economy has boomed. Today the cap-gains rate on long-term investments is 15%. Obama has suggested it should rise to 20%, a 33% increase. He's also suggested he might zero-out the rate for small firms and startups.
The latter would be better than nothing, but broad cuts in cap-gains rates would be best of all. They would lead to a surge in capital formation, business incorporations and millions of new jobs. A recent report from Ernst & Young found that U.S. cap-gains rates are already higher than in more than half of the world's top-performing economies. Raising them would only make us less competitive.
• Not raising taxes on the rich. This would be hard to do, given Obama's rhetoric on the stump. But those with incomes over $250,000 a year are the most likely to save and invest. And already they pay nearly 48% of all taxes, while 44 million middle- and lower-income households pay no taxes at all.
Obama has rightly called small businesses "the engines of our job creation." Well, 65% of those with incomes above $250,000 are small-business owners. According to Heritage Foundation data analyst Guinevere Nell, Obama's plans would give just 16% of small businesses a tax break. If Obama wants to help business create millions of jobs, putting a target on the backs of entrepreneurs won't help.
While he's at it, Obama should repeal the alternative minimum tax (AMT), the "millionaire's tax" that increasingly hits people not at the top incomes, but in the middle.
For the record, higher taxes on the rich is often a popular idea with newly elected presidents. Herbert Hoover liked it so much he jacked top income-tax rates from 25% in 1930 to over 60% four years later. Remember how that worked out?
• Ending the death tax. No pun intended, but this is a deadweight tax that raises little income but costs a lot. As it stands, the tax will expire in 2011 and then return in 2012 to its highest levels. This is morally indefensible and economically absurd.
The estate tax generates very little in revenues. And according to Heritage economist William Beach, it costs 170,000 to 250,000 new jobs each year. It's a loser.
Helping entrepreneurs may not be popular with many of Obama's key supporters and advisers. But they're the ones who can really stimulate the economy. If Obama wants to be more than a one-term president, he should keep them front and center in any recovery plan he unveils.
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