One is tempted to conclude that Mr. Obama’s proposals, at least partially unveiled over the past couple of weeks, are less an economic strategy than an expression of the baser instincts inherent among the left.
They certainly do not seem to be designed to create many jobs. They do, however, strike a rhetorical note which appeals to populist class warfare sentiment, the kind that offers simplistic, ersatz solutions like the “Buffett Rule”, which end up doing far more harm than good.
The President’s proposals, by his count, cost just shy of half a trillion dollars. It is ironic that this comes on the heels of a national debate which centered on the governments already mastodonic debt and, in Obama’s own words, profligate spending.
It is a classic case of throwing good money after bad. The first round of stimulus spending failed, not because of a lack of commitment, but because manufactured jobs are not sustainable, i.e. they are not created by the marketplace, but rather by someone external to the market who simply tries to wish them into existence.
Take, for instance, the plan to offer tax credits to employers for hiring workers. The entire concept is laughable. Employers do not hire tax write-offs, especially ones they will need to keep paying wages and benefits to — they hire to increase productivity and profitability. Try as he might, Barack Obama cannot simply will the economy into growth.
Neither will the recidivistic call for infrastructure spending make much of a dent in the unemployment numbers. These projects are no more “shovel ready” than they were two years ago – ironically due in large part to government regulations, studies, and permits holding projects up for years.
These $447 billion worth of measures are, at best, ineffectual, temporary stopgaps. By contrast, the tax increases proposed to pay for them have a permanence to them, which makes them even more harmful over the longer term.
The class warfare battle cry of “tax the rich” is the heart of Mr. Obamas plan. The mantra is, of course, based on a fallacy in the first place. Despite Warren Buffett’s caterwauling, the most affluent in America are already paying their “fair” share: according to the latest IRS data, the wealthiest 1 percent of Americans pay 37 percent of the country’s total income tax. The top 10 percent, who earn 44 percent of the income, pay 68 percent of the tax. Meanwhile the bottom 50 percent pay only 3 percent; most in that group pay no federal income tax at all.
In terms of rates, Buffett still hasn’t got it right. Earners making over $1 million pay on average 29 percent in tax. Contrast that with the roughly 12.5 percent paid by a household pulling in between $40,000 and $50,000, or the 5.7 percent paid by those making between $20,000 and $30,000, and the Buffet Rule begins to look positively anemic.
But wait, the class warriors cry, most of the money that the super-rich get is through investment income, and that is taxed at a lower rate; if we want to let Mr. Buffett do the right thing, and help pay for this spending, then let’s level the field by going after capital gains. Well, just a minute.
Following the 1979 reduction in the capital-gains tax from 49 to 28 percent, the Treasury collected $1.1 billion more in revenues than it had prior to the cut. When the rate was lowered again in 1981 from 28 to 20 percent, capital-gains revenues increased 24 percent between 1981 and 1983. In the two years following the 1997 rate cut, those revenues jumped from $66.9 billion to $114.7 billion.
It gets better. Every year that the capital-gains rate was decreased (1979, 1981, 1997), saw an increase in new stock offerings, indicating increased entrepreneurial activity. Each year that the rate was increased, business activity constricted.
So the question, lost among Mr. Obama’s logorrhea, is “is increasing taxes on the rich good public policy?” Specifically, “will raising taxes on the rich raise revenues?”, and, “what will the effects be on the economy and the prospects for reducing unemployment?”
The answer to the former is clearly “no”, and to the latter, “nothing good.” Taxing capital gains is a tax on investment and entrepreneurship, the two things that are necessary to resuscitate economic growth.
But Mr. Obama’s crusade is, really, about “fairness” and leveling, rather than economic growth. The unemployment figures left in the aftermath are just collateral damage in the class war.