Last week on June 14, President Obama announced his economic plan to finally bring economic recovery and growth to the U.S. in a much ballyhooed address inCleveland. He threw down the gauntlet to Mitt Romney on the issue, saying “more than anything else, this election presents a choice between two fundamentally different visions of how to create strong sustained growth; how to pay down our long term debt; and most of all, how to generate good, middle-class jobs….”
Truer words have never been spoken by the President. So let’s examine the two fundamentally different visions and see which can produce strong sustained growth, pay down our long term debt, and generate good, middle class jobs.
Under President Obama’s plan, on January 1 of next year the top tax rates of virtually every major federal tax will increase, as already enacted under current law. That is because the tax increases of Obamacare would go into effect, and the Bush tax cuts would expire, which Obama refuses to renew for singles making over $200,000 a year, and couples making over $250,000. The English translation of that target for the tax increases is the nation’s small businesses, job creators and investors.
As a result, with the Bush tax cuts just expiring for these targeted taxpayers, the top 2 income tax rates would jump by nearly 20%, the capital gains tax would soar by nearly 60%, the tax on dividends would nearly triple, the Medicare payroll tax would skyrocket by 62% for the above disfavored taxpayers, and the top death tax rate would rise from the grave to 55%.
That is all on top of the highest corporate tax rate in the industrialized world at nearly 40%; counting the federal corporate rate of 35% and state corporate rates on average. But under Obama, there is no relief in sight. Instead, Obama is pushing still more tax increases. Under his proposed Buffett rule, the capital gains tax rate would increase by 100%, and would be the fourth highest in the industrialized world. Many OECD countries, in fact, impose no capital gains tax because it is just another layer of taxation on capital income on top of the corporate and individual income taxes. All of this would leave American businesses uncompetitive in the global economy.
How is this going to produce strong sustained growth and generate good middle class jobs? It is going to do just the opposite, as the multiple tax rate increases would only sharply reduce the incentive for productive activities, such as savings, investment, business expansion, business start ups, and job creation. That will simply encourage even more capital flight from the U.S., and a continued capital strike by the capital that remains. All this translates into yet another recession next year, with fewer jobs, rising unemployment, and soaring deficits and debt. This does not signal Obama fighting for the middle class; instead it points to him trashing the economic chances of the very voters whose favor he seeks.
The alternative GOP vision is spelled out in the budget produced by House Budget Committee Chairman Paul Ryan, which was passed by the Republican controlled House, and is supported by Romney. That includes individual tax reform closing loopholes and reducing tax rates to 25% for couples earning over $100,000 per year, and 10% for those making less, and corporate tax reform slashing crony capitalist loopholes and reducing the 35% federal rate to an internationally competitive 25%. And then the aforementioned Obama tax increases would be repealed. CBO has scored these tax reforms as restoring federal revenues to their long term, postwar, historical average from 1948 to 2008 of 18.5% of GDP.
The reduced tax rates under such reform would produce exactly the opposite results of Obama’s tax rate increases, increasing incentives for all of the above productive activities. That would restore traditional American prosperity and job creation as a result.
But in his speech in Cleveland, Obama opposed tax reform that would lower rates and close loopholes. He said it would be a tax increase on the middle class. The problem for Obama is that Ryan’s tax reform plan does not involve any tax increase for the middle class. His plan cuts tax rates for every taxpayer, including those in the middle class. And that has always been the Republican position.
President Reagan cut tax rates across the board for everyone, including the middle class, and expanded the personal exemption, which benefits middle and lower income taxpayers the most. President Bush cut tax rates for everyone, and for lower income workers by a greater proportion than for higher income workers. As a result, by 2007, before President Obama had even entered office, official IRS data showed that the middle 20% of all income earners, the true middle class, paid only 4.7% of all federal income taxes.