Jason Furman and Austan Goolsbee, two top economists for the Obama campaign, recently wrote an opinion-editorial defending Obama’s increasingly frightening tax plan. The piece aims to proclaim the virtues of doling bread and circuses to the masses, and to justify one of the largest tax increases in American history. Obviously, this deserves some examination since these taxes are likely to become next year’s reality.

Speaking in the tongues of the Obama cult, the op-ed explains that Obama’s tax plan is premised on the “broken status quo.” They’re certainly not referring to fact that the bottom 50% of taxpayers pay under 3% of the income tax burden, and the top 1% pay 40%. Obama prays nightly to see these statistics further stratified. When liberals wail about the tax status quo, they are referring to Washington’s failure to address income inequality and introduce social justice.

Obama envisions the richest Americans paying an even greater share, and the downtrodden 50% paying nothing at all. Unfortunately, he seems oblivious to the fact that higher top tax rates shrink the amount of taxable revenue. This is because people respond accordingly to positive and negative incentives. High taxes are a negative incentive that discourages work. Since the reward of work – for rich and poor earners alike – is money, payroll and income taxes detract from work’s reward. Eventually, the diminishing returns of work are reduced to such a level that leisure becomes preferable to work. Taxes accelerate earners’ natural shift from work to leisure, depriving the economy of potential output and the government of potential tax revenue.

The downside of high taxes is especially devastating when the rich bear the majority of the tax burden. Since most of America’s business owners and entrepreneurs are in the upper-income tax brackets, sapping their will to work with high taxes compromises business growth, and kills potential job opportunities for Americans.

For example, under President Carter, the top income tax rate was 70%, yet the richest 1% paid only 19% of Federal taxes, rather than the 40% that they pay today with a top rate of 35%. In other words, the rich paid more at a lower rate than they did at a higher rate. President Coolidge lowered the top rate from 73% to 25%, and the government witnessed a budget surplus. President Reagan slashed the top rate from 70% to 28%, Federal tax revenue decreased by only 1%. In these cases, high tax rates repelled economic activity, and thus constrained tax revenue. Lowering the top rate encouraged growth, and expanded the government’s taxable income, thus increasing total tax revenue. An appreciation of the inverse correlation of tax revenue and tax rates destroys conventional tax policy.

However, United States’ taxation is indeed broken. A study by the Tax Foundation estimates that nearly $265 billion is wasted merely in complying with the Internal Revenue Service’s 67,000 pages of administrative statutes and regulations. These billions of dollars are an unacceptable opportunity cost; imagine the good that a regular addition of $265 billion – far more than last spring’s so-called “stimulus” – would do to the American economy.

Sadly, Obama – who bills himself as a revolutionary reformer – will not challenge the injustice of the IRS. Rather than truly simplify American taxes by implementing a flat tax or a consumption tax, Obama wants to lead America further into the labyrinth of deductions and credits.

The op-ed claims that, “Overall, Sen. Obama’s middle-class tax cuts are larger than his partial rollbacks for families earning over $250,000, making the proposal as a whole a net tax cut and reducing revenues to less than 18.2% of GDP – the level of taxes that prevailed under President Reagan.” Yet Obama’s tax credits are not authentic tax cuts, but stealth income redistribution. An individual’s owed taxes would be subtracted from his credit; the difference is how much he will be “refunded.” This clearly benefits those who already pay nothing in Federal taxes, for they shall be refunded credits with no subtracted taxes. Billing this income redistribution as a tax cut is grossly misleading, if not outright untrue. Rather than champion change, Obama is digging our graves deeper into the current status quo.

Despite Obama’s past remarks about a high-tax ideology and anti-rich agenda, he now apparently advocates raising taxes simply for revenue’s sake. Of course, this proves that Obama remains ignorant of the negative correlation of taxes and revenues, as discussed above. Planning an increase of $100 billion, he will blithely raise top tax rates, but will be disappointed by the expected revenue shortfall.

Nevertheless, the amount of squirming that Obama’s economic acolytes do to gloss over their master’s tax increases is amusing. Here is what they promise:

(1) The two highest income tax brackets – $164,551 and $357,701, respectively – would be raised to 36% and 39.6%.

(2) The top capital gains rate – for families over $250,000 – would be raised to 20%.

(3) The top dividends rate – for households making over $250,000 – would be raised to 20%.

(4) The death tax would apply to only .3% of estates, and raised to 45% for estates worth over $7 million.

(5) A special tax will be levied on earnings exceeding $250,000 at a rate between 2% or 4%. This is supposed to solve Social Security’s financial woes.

Payroll Taxes

Obama’s biggest tax increase of all – uncapping FICA taxes on incomes exceeding $250,000 – would amount to a total tax increase of approximately 16%, sending the top rate soaring to 52.4% – not even counting state income taxes. So instead of returning tax rates to the cool 1990s, Obama would send them back to the groovy 1970s, when the misery index (combination of inflation and unemployment rates) reached a crippling 22%. Thankfully, the op-ed claims that Obama would only uncap payroll taxes on earnings exceeding $250,000 by a percentage 2% or 4%. This is a relative improvement, but still an unnecessary tax.

Politicians refuse to acknowledge that Congress’ raids of the Social Security Trust Fund, combined with the narrowing of the taxpayer/retiree ratio has doomed the program to bankruptcy. Its only hope is to be resurrected as a private savings plan, rather than as a system of social insurance. Again, rather than embracing true change and privatizing Social Security, Obama opts to worsen the status quo by heightening the tax burden of a chronically insolvent program.

Income Taxes

Liberals have always failed to understand the indirect consequences of their taxes. They mistakenly believe that taxes targeting the rich will be confined to the rich. Sadly, saddling the rich with the cost of big government hurts everyone, especially the lower and middle classes, who are more sensitive to slight economic vagaries, and are the first casualties of contraction or recession.

More disposable income in anyone’s hands – rich or poor – will return to the economy somehow. The difference is that while the middle class spends most of its money on basic consumption, wealthy earners have a surplus to either save or invest. Depositing money in a bank increases that bank’s lending capacity, allowing them to make more loans to others. Investing money increases a businesses’ capital, which can help keep a company productive and competitive. Both of these options ultimately redound to the bottom of the pyramid’s benefit through lower interest rates and a lower price level.

As explained earlier, higher income taxes poison the economy by choking off key incentives to open new or expand current businesses. The economic reward of success – money – is less enticing when the government takes a hefty percentage of it, and so many settle for more leisure and less money than less leisure and more money. Unfortunately, the entrepreneurs that Obama is so eager to tax create jobs for other Americans. Since a stable job is the best way of ensuring a family’s housing, education, and health, punishing the rich with high taxes also punishes the rest of Americans by denying them potential job opportunities.

Few understand that everyone can indirectly benefit from public policy that directly benefits another; the positive or negative effects of legislation are not confined to their targeted class. A tax cut for the rich does not merely benefit the rich, but “trickles down” to everyone. Similarly, higher taxes on the rich will diffuse throughout the economy, pinching output.

Most of America’s small businesses are subchapter-S corporations or limited liability companies, neither of which pay taxes on their profits. However, both are subject to FICA and income taxes, meaning they will be hurt by Obama’s new tax rates. If Obama seriously believed that “small businesses are the engine of job growth” and that “one of the principal problems facing the economy today is the lack of discretionary income for middle-class wage earners” then he would not be so eager to raise their Federal taxes.

Although he offers conditional tax credits to small businesses and eliminates capital gains for small businesses and other start-ups, Obama’s overall Federal tax burden negates this largess. Exemption from capital gains is irrelevant when over 50% of your paycheck disappears into the Beltway black hole, and you’re forced to “contribute” to a social insurance program at a loss. Besides, further complications of the tax code keep the billion-dollar cost of compliance with the IRS high.

It is easy to see the hypocrisy in Obama’s alleged devotion to small businesses. For example, he touts the threat of an ephemeral “windfall profits” tax (the gallows of anti-capitalist witch hunts), damns Wall Street’s “ethic of greed” for destroying middle-class livelihoods, and supports on the extortionate “pay or play” health-care tax. And then there is affirmative-action harpy Michelle Obama – reporting six-figure salaries at various sinecures – stigmatizing the business world by exhorting young people to eschew “corporate America” for volunteer work. Meanwhile, she and her husband live in a ritzy Chicago neighborhood on million-dollar royalties from his book sales, donating a paltry 5% to charity.

Capital Gains and Dividend Taxes

Obama is not only increasing top earnings taxes, though. Dividends and capital gains rates are also scheduled to rise. Dividends (payments made from corporations to their shareholders) and capital gains (profits from the sale of capital assets) are crucial investment incentives. However, raising taxes on these incentives will diminish their appeal and reduce overall investment. Individuals who would have otherwise risked an investment for the hope of comfy dividends or hefty trading profits will use their money elsewhere. Businesses will avoid losing money to a dividends tax by simply reducing the amount or frequency of their dividends. Many retirement plans rely on the receipt of regular dividends, making dividend tax hikes a threat to many Americans’ retirement.

Continual investment is crucial to a dynamic and resilient economy. Businesses – especially new ventures – rely on the capital from investment to expand. Entrepreneurship will wane without this key source of start-up money. The “alternative energy” industry would benefit from investment. Investors would buy stock in the most promising companies, giving them the necessary capital to expand their operations. If business succeeded and its stock price increased, those investors could sell their stock for a profit, or enjoy receiving dividends from it. The country benefits from a more affordable and efficient source of alternative energy; the profitable energy company provides employment to many Americans; and the investors are financially rewarded for their insight. However, the wedge of capital gains and dividends taxes abort such success stories.

Death Taxes

Levying taxes on rich estates is a Democrats’ dream come true. The political fallout is virtually non-existent, since few Americans sympathize with a rich inheritor’s tax burdens. However, like all taxes, the pains of a high rate often spread to others.

In a 1994 study, the Tax Foundation determined that the current death tax rate of 55% had the same effect as a doubling of one’s marginal income bracket. Since Obama will raise the top two income rates to 35% and 39.6%, and set the death tax at 45%, it’s likely that top earners will behave as if income taxes were roughly 70%. As discussed above, such steeply progressive marginal rates discourages hard work and productivity. Punishing rates make each hour of work less rewarding, compelling workers to simply work less and/or retire early. The result is less wealth generation and a poorer America.

Bush’s Tax Cuts

Recent economic woes have tainted the otherwise prosperous two terms of President Bush. The president has little power over the current depreciation of the dollar, inflationary spike in commodities, and lack of liquidity in the credit market, but still serves as a popular scapegoat for the masses. However, the real culprit is the specter of Keynesian monetary policy at the Federal Reserve. Bush’s 2001 and 2003 tax cuts were crucial in lifting the country from Clinton’s recession, as well as reassuring shaken consumers and investors after the 9/11 terrorist bombings. Voters should also remember that the United States’ gross domestic product led the developed world with an average growth 2.5% from 2001 to 2005, and that data from the Census Bureau charts increased tax revenues (despite lower rates) from upper-income taxpayers.

Recognizing the value of his predecessor’s tax policy, Obama should defend Bush’s tax cuts on earnings, capital gains, and dividends, and further reduce corporate tax rates, if not remove them altogether. This would not be the dreaded disaster predicted by the liberal Cassandras. In fact, it would be an amazing change from over a century of IRS failure, inviting a wave of foreign investment, as well as a mass return of American companies lost to the offshore exodus.

Edmund Burke, lamenting France’s expropriation of church property, wrote that “…an absolute democracy, no more than absolute monarchy, is to be reckoned among the legitimate forms of government. Of this I am certain, that in a democracy, the majority of the citizens is capable of exercising the most cruel oppressions upon the minority, whenever strong divisions prevail in that kind of polity.” Despite its clever rationalizations and slick half-truths, Obama’s tax policy is ultimately derived from the crude mob rule that Burke observed in France.

Perhaps Ayn Rand said it best when she noted that, “The smallest minority on earth is the individual. Those who deny individual rights cannot claim to be defenders of minorities.” Until Obama pledges to respect the dignity of all men – both rich and poor – he is nothing more than another populist pitting Americans against each other.

<%image(20080814-change.jpg|268|244|Obama proselytizing to some born-again socialists)%>