http://www.dallasnews.com/sharedcontent/dws/dn/opinion/viewpoints/stories/DN-viard_30edi.ART.State.Edition1.4abd098.html American Enterprise Institute: What's really wrong with Obama tax plan
12:00 AM CDT on Thursday, October 30, 2008 Alan D. Viard is a resident scholar and Alex Brill is a research fellow at the American Enterprise Institute. Arthur C. Brooks will become president of AEI on Jan. 1. We've heard a lot this month about how Sen. Barack Obama's tax plans would affect Joe the Plumber – the Ohio man who recently asked the Democratic nominee whether he planned to raise his taxes. The entire episode has only added to the confusion over what Mr. Obama is proposing for middle-class taxes. How should an honest fiscal conservative see the situation? For those making less than roughly $200,000 ($250,000 for couples), Mr. Obama would not only make President Bush's tax cuts permanent but would also offer an array of new tax credits. These "tax cuts" contain some sleight of hand. More than $400 billion of the money over the next 10 years would take the form of refundable tax credits paid to people who already pay no federal income tax. And the cuts would put more money in the pockets of some families. Who can be against a boost to spending power and consumption? We can. While a few of Mr. Obama's proposals may be sensible, the overall package would be bad for the economy. Unlike rate cuts for high incomes or reductions in investment taxes, most of his proposed tax cuts would do little to reduce the tax penalty on work and saving. For some households, the penalty on work and saving would increase because the new tax credits would be phased out as income rises. These proposals wouldn't deliver the economic growth that incentive-based tax cuts would. Furthermore, there is no free lunch. This middle-class tax relief would have to be paid for. Middle-class tax cuts might make sense if they were paid for by spending cuts, but that is not Mr. Obama's plan. Like his opponent, Mr. Obama points to vague savings from reducing waste, the kind of savings that never seem to materialize. He also hopes to reap savings by accelerating our redeployment from Iraq, a project with an uncertain fiscal impact. At the same time, he proposes a wave of new spending on health care, education, energy and infrastructure programs and declares his opposition to reforms that would reduce the growth of Social Security and other entitlement benefits. So where would the money come from for the tax cuts and new spending? Largely from raising other taxes: the ones that have the biggest impact on economic growth. Mr. Obama would let key parts of the Bush tax cuts expire, causing the top tax rate on ordinary income to go back to 39.6 percent, up from 35 percent today. The capital gains and dividend tax rates would rise to 20 percent from today's 15 percent. Mr. Obama might also impose Social Security tax at a rate of up to 4 percent on wages and self-employment income above $250,000, starting in 2019. If rewards for entrepreneurs and firms are reduced through higher marginal tax rates, incentives to earn, invest and create jobs will be diminished. Americans will have less incentive to save, and firms will have less incentive to pay dividends. Tax avoidance will become more profitable. A smaller capital stock will mean a less productive economy and lower wages for middle-class and other workers. These disincentive effects also mean that the revenue gain is likely to be smaller than Mr. Obama envisions. In sum, Mr. Obama may very well give Joe the Plumber a tax break, but only if Joe does not become too successful. He is offering real tax favors for the middle class, but not real benefits for the economy. Alan D. Viard is a resident scholar and Alex Brill is a research fellow at the American Enterprise Institute. Arthur C. Brooks will become president of AEI on Jan. 1. WHO else will be on your ballot? Find out, and read their answers to our questionnaire. dallasnews.com/voterguide --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. Register and vote in our polls. * Read the latest breaking news, and more. -~----------~----~----~----~------~----~------~--~---
