It raises suspicion when a liberal presidential candidate is incorporating the words “tax cut” in his campaign rhetoric.
The New York Times headline read “Obama Proposes Tax Cuts for Middle Class and Elderly.” The Financial Times headline gave the same impression: “Obama pledges $85bn middle-class tax cuts.” But those headlines are disingenuous.
According to the September 19 New York Times, liberal Democratic presidential hopeful Barack Obama said he would create a tax credit for homeowners who do not itemize their deductions, give a $500 tax credit to workers, and eliminate income taxes for elderly taxpayers who make less than $50,000 a year.
Those acts, totaling $85 billion, sound great, but how’s he going to compensate for these measures and still be able to afford all the entitlements in his platform?
The candidate, who dubbed his announcement a “Tax Fairness Plan,” would “raise capital gains taxes on the wealthy, close corporate loopholes and abolish tax breaks that have saved hedge fund and private equity managers billions of dollars,” according to the Times.
But that’s classic income redistribution, and it would hurt those who keep the economy going.
“The Obama plan is terrible economics by virtue of adding disincentives to productive activity through his big tax increases,” said Dr. John Berthoud, president of the National Taxpayers Union, to the Business & Media Institute. “And while he apparently calculates that his $1,000 tax credits will be politically popular, they will provide little benefit to the economy.”
“These look like headline-grabbing sops for the voters,” said an unnamed Democratic economist, who has advised all the campaigns, to the Financial Times. “But there doesn’t appear to be an overall fiscal framework.”
And not everyone’s buying into it either.
“[T]his seems like a bunch of subsidies, temporary rebates, credits – clutters up the code,” said CNBC “Kudlow & Company” host Larry Kudlow on his September 19 show in an interview with Obama’s economic advisor, Austan Goolsbee. “There’s no pro-growth, no pro-investment impact. And, in fact, you’re going after the cap-gains and dividends and upper income people.”
The talking point echoed by Goolsbee, which was also in both the Financial Times and New York Times stories, was the capital gains tax increase (from the current 15 percent to as much as 28 percent) is still lower than the level Ronald Reagan held during the latter part of his term.
“Larry, I wish I could call my mom in Abilene, because I never imagined there would be a day I would go on television and be saying to Larry Kudlow that it’s okay to set a tax rate that’s lower than what Ronald Reagan set,” said Goolsbee. “What planet have I landed on?”
But that’s not the whole story. The increase in the capital gains tax in 1986 was part of the Tax Reform Act of 1986 and Reagan called the increase “the one detrimental fallout from tax reform,” according to a policy analysis written by Stephen Moore and John Silvia. And, as an Investor’s Business Daily editorial published on July 30 pointed out – the hike was a “compromise deal that produced the landmark 1986 tax reform act, which cut the top marginal income tax rate to 28%.”
The IBD editorial also showed the compromise deal ended up not being worth it – “the growth-killing 1986 capital gains tax increase led to a decrease in investment that resulted in 44% fewer revenues over the following three years.”
Berthoud, a BMI adviser, said Obama had other options if he wanted to cut taxes for certain taxpayers.
“Rather than raising taxes on the private sector and investors, Mr. Obama might consider a far more sensible way to find the dollars for tax relief – by curbing federal spending,” Berthoud said.