Soak the Rich? We’ll All Get Wet

Published June 30, 2008

The next time you hear a presidential candidate, Congressperson, or anyone else say we need to raise taxes on the wealthy, remember the tax probably will hit you–maybe not immediately, but a lot sooner than you’d like.

The income tax was originally aimed at only the wealthiest Americans, as was the federal tax on telephone service. And the notorious “alternative minimum tax” (AMT) was conceived in 1969 after Congress learned 155 high-income earners were able, perfectly legally, to avoid paying income tax through tax shelters, deductions, credits, etc.

The AMT now hits more than 4 million households and would ensnare more than 20 million without temporary “fixes” approved each year by Congress.

Sen. John McCain, the presumptive Republican Party nominee for president, supports extending the 2001 and 2003 federal tax cuts that are set to begin expiring in 2010. He also wants to eliminate the AMT. This is good.

Sen. Barack Obama, the presumptive Democratic candidate, has repeatedly dodged taking a position on AMT reform. It’s important to know what he thinks about it. A Congressional Budget Office report noted if Congress does not reform or eliminate the AMT, by tax year 2010 (payable in 2011), “One in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax.”

A married couple with four children and an income of $100,000 would pay $2,700 more in taxes under the AMT, according to an analysis by Deloitte Tax.

Obama openly advocates raising taxes on high-income earners, whom he defines as earning about $250,000, and proposes lifting the income limit on the payroll tax for Social Security and Medicare, now at $102,000. Persons earning more than $250,000 a year could be hit with an effective tax rate of more than 55 percent even before state taxes, according to the Tax Policy Center, a joint think tank of the left-leaning Brookings Institution and Urban Institute.

These high-income earners are the people whose investments drive the economy and create jobs for the rest of us. Obama wants that money to go to the government instead.

He proposes nearly doubling the tax on capital gains and dividends, to 28 percent from 15 percent. This would hurt virtually everyone who has a 401(k), Individual Retirement Account, pension, or similar vehicle, as the higher taxes reduce the value of investments. This, of course, includes tens of millions of middle-income people on whom he promises not to raise taxes. It also would further reduce investment money for U.S. businesses, making them less productive and competitive.

In addition to all this, Obama endorses a “windfall profits” tax on energy companies. This would further raise the cost of gasoline and other fuels and reduce domestic energy production, making us even more dependent on foreign sources. This is exactly what happened when we had a windfall profits tax in the 1980s–which is why it was repealed in 1988.

Obama’s definition of “windfall profit” is dubious, to say the least. The American oil industry in 2007 had a profit margin of 8.3 cents per dollar of sales, compared with 8.9 cents for the U.S. manufacturing industry, 13.7 cents for computer equipment makers, 14.5 cents for electronics firms, and 19.1 cents for tobacco and beverage companies. He has yet to call for windfall profits taxes on these more-profitable industries.

McCain has been all over the map on taxes, including votes to oppose the 2001 and 2003 cuts he now supports. He recently attacked “obscene profits” of energy companies and denounced those who “speculate” in oil markets, which suggests an eagerness for more government intrusion, likely meaning punitive taxes like those Obama supports.

It’s a bad choice, people. Both candidates advocate taking more of our money by raising taxes, driving up consumer prices, and restricting our ability to invest to build wealth. With many in Congress openly friendly to these policies, it may not be long before they become law.

Before long–and probably too late–millions of Americans would learn these taxes on “the rich” actually target them.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.