There is a stark contrast between the tax plans being proposed by John McCain and Barak Obama. There is no need for me to go into the details of each candidate’s tax plans. If you are interested in the details, go to the campaign website for each candidate. Links to the campaign websites are available on the right side of this page.
McCain says he does not want to raise anyone’s taxes. Obama says he will raise taxes only on the richest Americans and that 95% of “working families” will actually receive tax cuts under his plan. Obama believes the richest Americans are not currently paying their fair share of taxes and should pay more.
I would like to address four questions relating to taxes. First, what should be the purpose and philosophy behind the federal government’s tax policies? Second, what is the likely effect of implementing the different tax policies proposed by the two candidates. Third, are the richest Americans currently paying less than their fair share of the total tax burden? Fourth, will 95% of “working families” receive tax cuts under Obama’s plan as he claims?
What should be the purpose and philosophy behind the federal government’s tax policies?
The purpose of taxation in my opinion should be to provide the government with the income it needs to perform essential government services in a manner that is fair to all citizens and in a manner that promotes rather than stifles economic growth. I do not have a problem with progressive tax rates, which we have today, under which higher levels of income are taxed at higher rates. I do not agree, however, that fairness requires the use of taxes to redistribute income from those who have earned it to those who have not. I strongly disagree with Obama’s philosophy, as articulated to the now famous Joe the Plumber, that tax policies should be designed to “spread the wealth around”.
What is the likely effect of implementing the different tax policies proposed by McCain and Obama?
The government’s tax policies can have the effect of stimulating the economy and encouraging growth, which benefits everyone, or of discouraging the savings and investment that is necessary for businesses to grow and for new jobs to be created.
In my opinion, Obama’s proposed tax increases on the richest Americans would substantially weaken an already weak economy. If Obama becomes President and imposes an even heavier burden on the “rich,” I believe the “rich” will find ways to ease the burden, and the result will be less overall government revenue. Moreover, there is an abundance of historical evidence to the effect that increased taxes result in less money available for investment and job creation whereas reduced taxes stimulate the economy and lead to increased government revenue. Do you think you can reduce the incentives for people to work hard, invest, and create jobs without affecting hard work, investment, and job creation? I don’t. For me, I would rather let the “rich” keep their money and invest it than require them to send even more of their money to the government. If you want more of something, like investment and job creation, you tax it less. If you want less of something, you tax it more. It’s as simple as that.
The Heritage Foundation’s Center for Data Analysis (the “CDA”) conducted an economic analysis of the tax policies proposed by McCain and Obama. The Heritage experts made the following conclusions after comparing the plans proposed by McCain and Obama:
(1) More jobs will be created under the McCain plan than under the Obama plan. The CDA concluded that job growth over a ten-year period would be more than twice as high under McCain's plan than under Obama's. It estimated that total annual employment would grow an average of 915,800 jobs under Obama, and by 2,126,000 under McCain.
(2) Overall economic activity will be more vigorous under McCain's plan. The CDA concluded that McCain's plan would yield consistently higher forecasts of economic output than Obama's. Increases in gross domestic product would be nearly three times higher, on average, under McCain’s plan than under Obama’s.
(3) There would be more after-tax spending potential under McCain’s plan than under Obama’s. Using the same model to evaluate both plans, the CDA analysis showed that a family of four would have an average of $5,138 more in disposable income under McCain's plan, and $3,631 more under Obama's.
If you think the primary objective of tax policies should be fairness and redistribution of wealth, then the Heritage Foundation’s conclusions will not be important to you. If you think the primary objective of tax policies should be economic progress, then the Heritage Foundation’s conclusions are probably consistent with your common sense.
Are the richest Americans currently paying less than their fair share of the total tax burden?
Obama and his fellow Democrats want you to believe that the Bush tax cuts in the early part of this decade favored the rich and that the rich are not currently paying their fair share of the total tax burden. Let’s take a look at the facts and then you can draw your own conclusions. The facts are that the top 1% of taxpayers paid 40% of all income taxes in 2006 (the highest share in the last 40 years), the top 10% paid 71% of all taxes, and the top 50% paid 97.1% of all taxes. The rich, of course, paid more taxes because they earned more income. The top 1%, for example, earned 22% of the income but paid 40% of the taxes. The bottom 50% earned 12% of the income but paid only 3% of the taxes.
According to the Tax Policy Center, in 2008, the average combined rate of federal income, payroll, and estate taxes will be 1.1% for the lowest 20% of the income distribution, 15.1% for the middle 20% of income distribution, and 26.2% for the highest 20%. The Tax Policy Center estimates that in 2008 the top 20% of income earners will pay 87.5% of all income taxes and 39.9% of all payroll taxes. These figures, of course, do not reflect the tax increases being proposed by Obama.
If you examine the facts, it is clear that we already have a steeply progressive tax code without the new taxes that Obama wants to impose on the rich. Do you think the top 1% of taxpayers should pay more than 40% of all income taxes or that the top 20% should pay more that 87.5% of all income taxes? What is your definition of fairness? Where would you draw the line?
In discussing taxes, it is important to recognize the difference between income taxes and payroll taxes. Income taxes are designed to provide the government with the revenue that it needs to operate. Payroll taxes represent a mandatory retirement savings plan—the Social Security system—administered by the government. The philosophy behind payroll taxes is that you pay money into the system while you are working and receive Social Security benefits when you retire. The amount of your Social Security benefits upon retirement is based upon the amount that you paid into the system while you were working. Obama has proposed an additional payroll tax on individuals with annual income above $250,000 to help fund the government’s Social Security obligations. He has not said, however, whether additional benefits would be paid to these individuals upon their retirement. As discussed below, Obama also has proposed to send checks in the form of “refundable tax credits” to people who pay payroll taxes but have no income tax liability. These individuals presumably would not receive reduced Social Security benefits upon retirement. In short, Obama’s plan would fundamentally change the philosophy that has governed the Social Security system since it was created in 1935.
Will 95% of “working families” receive tax cuts under Obama’s plan as he claims?
The short answer is no. Obama’s claim that 95% of “working families” will receive a tax cut under his plan is misleading and dishonest. For starters, approximately 40% of the citizens who file income tax returns are not paying any federal income taxes under the current system. How do you give a tax cut to someone who does not pay income taxes? Obama would give “refundable tax credits” to people who pay no income taxes. He refers to these “refundable tax credits” as tax cuts. A “refundable tax credit” is a transfer of money from someone who is paying taxes to someone who is not.
In an editorial dated October 13, 2008, The Wall Street Journal described a “refundable tax credit” as “Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer—a federal check—from taxpayers to nontaxpayers. Once upon a time we called this ‘welfare’… Mr. Obama’s genius is to call it a tax cut.”
I have two problems with Obama’s plan to send government checks to people who do not pay income taxes. The first is that Obama is being deceptive by promising “tax cuts” to people who don’t pay income taxes. In reality, the tax cuts described by Obama are not tax cuts but are part of his plan to use the tax code to “spread the wealth around.” I would be more sympathic to Obama’s plan if he would be honest about it rather than trying to fool the American people. My second problem is that I do not believe Obama’s plan will work for the reasons outlined in a column written by Arthur B. Laffer and Stephen Moore and published in The Wall Street Journal dated September 15, 2008. After summarizing their study of Census Bureau data on income and poverty, Mr. Laffer and Mr. Moore reached the following conclusion:
“Taking from the rich through much higher taxes in order to help the poor and middle class makes no sense intellectually and has seldom worked in practice. Reducing rates, on the other hand, does increase the share of taxes paid by the highest income-earning group…… We suspect that Mr. Obama will discover that when you put ‘tax fairness’ ahead of economic progress, you produce neither.”
The Bottom Line
Here is what worries me the most about Obama’s tax plans. We already have a system under which approximately 40% of the citizens who file income tax returns are not paying any income taxes. Under Obama’s tax plans, this percentage will increase and, in addition, many of those who do not pay income taxes will receive a check from the government. You can call this check whatever you want—a rebate, a refundable tax credit, a subsidy, welfare or any other label you prefer. Regardless of the label, we are rapidly approaching the point where the majority of the voters in this country will not pay income taxes, and many of them will receive a check from the government instead of sending a check to the government.
As George Bernard Shaw once said, “A government that robs Peter to pay Paul can always depend on the support of Paul.” We will soon have more “Pauls” than “Peters.” How long do you think a system like this can survive? It may survive for my lifetime, but I don’t see how it can survive for the lifetimes of my children and grandchildren. Maybe you don’t care, but I do. I love this country, despite all its faults, and I hope and pray that it will continue to prosper as a beacon of freedom in the world. Votes have consequences. Your vote in this election could well determine the future of the United States of America.
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People seem to assume that taxes do not change the way people act but I think empirical evidence shows that the economy does better when taxes are lower.
Another word for giving tax cuts to people who do not pay taxes might be "charity." I can be charitable with my money but if I extort money from someone else for charity it is immoral.
I own a small business. Founded the business 15 years ago. We have nine employees, a facility with expensive equipment, pay medical insurance premiums for each employee and have a generous profit sharing plan.
And all the rhetoric surrounding Joe the Plumber is just a red herring covering the incredibly wrong-headed taxation, energy and fiscal policies of the last eight years.
So to say that Obama's tax plan is detrimental to small businesses does not fit my 15 year experience as a small business owner.
First, for a small business, Uncle Sam is the absolute LAST in line to reap any benefits from a small business.
Uncle Sam only collects his toll when ALL the other expenses, hires, raises, profit sharing contributions and bonuses are paid. PERIOD!
And as the owner who wants to derive more personal income from his company, I have to say the things that have the greatest impact on my company's health and my personal financial well-being is when poor government policies cause:
• Gasoline/diesel prices to double and triple in price, costing me an extra $1 to $2 dollars for each gallon that I buy and destroying my clients' profitability;
• Food commodities to triple in price, causing my clients to lose money on businesses that were profitable just six months prior;
• A reduction in the disposable spending of middle class Americans who buy my clients' products or visit my clients' restaurants;
• My personal investments to take a nose dive, thereby wiping out my hard earned savings and investments.
The incremental $300 that I may save in taxes for each incremental $10,000 that I may pay to myself is a mere pittance compared to the detrimental effect that the GOP / Bush's energy, tax and fiscal policies have had on my company and my personal financial success . . .
. . . Besides that, what is so terribly wrong with giving a man or woman who is working full time and trying to support their family on less than $15 - $20 thousand per year a break?
I agree with Tim that Uncle Sam does not reap tax benefits from a small business until all expenses have been paid. The expenses of operating the business are deductible for tax purposes. I also agree with Tim that small businesses—and all businesses for that matter—do much better when the economy is doing well. We disagree, however, on where to place the blame for our current problems and for the steep decline in his personal investments, a problem that I share with him and that has affected me greatly as a retiree who is relying exclusively on my personal investments for my retirement income.
The first domino to fall in the current financial crisis involved subprime mortgages. Who promoted, encouraged, and protected subprime mortgages? The Republicans or the Democrats? Who tried to impose more regulation on the subprime mortgage market but faced strong opposition from the opposite party? The Republicans or the Democrats? Whose policies limited our ability to use our own energy resources and to rely instead almost exclusively on foreign oil for our energy needs? The Republicans or the Democrats? Whose policies kept interest rates too low for too long and led to inflation? The Federal Reserve Board or the Bush Administration?
I am not trying to protect President Bush. With a few exceptions, including the war on terror and his tax cuts, I think President Bush has been very ineffective as a leader. But I do not think it is either accurate or fair to blame our current problems exclusively on the energy, tax and fiscal policies of the Republicans and the Bush Administration. Moreover, Bush is not running for re-election. If you are still trying to decide whether to vote for McCain or Obama, I think you should base your decision on the various policies being advocated by McCain and Obama rather than on Obama’s so-far successful efforts to make the election a referendum on the Bush Administration.
I also agree with Tim that we should give a break to people who are trying to support a family on $15,000 to $20,000 a year. I would emphasize, however, that anyone supporting a family at this income level is not currently paying any income taxes. We already have a steeply progressive income tax structure. For me, I think I can help these people more through my support of my local church and local charities than by paying more taxes to the federal government. My church does far more good with a mission budget of $100,000 than the government could do with $10 million, and I frequently have the pleasure of interacting with the people we are helping on a face-to-face basis.
I would also say this to Tim. If Obama is elected, be sure to keep your business small or you will be faced with a massive amount of new regulations, expenses and government mandates.
Let's start with Energy.
If one goes back and reads the 2001 Cheney Energy plan (I have) and sees how incomplete and slanted the analyses was, it is easy to see how we got into our Energy mess.
It is amazing that the words "China" and "India" only appear twice in the entire report. More importantly, there was no strategic reference to their rapidly increasing use of energy as their economies develop and the impact this will have on Energy availability and costs. Opps!
Let's go to the 2003 vote on the fuel CAFE standards. This vote led to the reduction in our auto milage standards for the first time since the 1970's and directly increased our consumption of foreign oil. Opps!
Let's consider the impact of fossil fuels on the environment and how the GOP basically dismissed all references to it in official reports, etc. And no one in the GOP questioned them on it. Opps!
And lets not forget that no matter whether additional drilling starts on the Alaskan North Slope or in our coastal waters, that we simply do not have the oil reserves to match our consumption.
Now let's talk about our nation's fiscal policy.
For the first time in history, we have allowed our nation to fight a war without increasing national revenues.
As a result, our nation's deficit has doubled and our debt to China (and other governments) is obscene and fiscally dangerous. This has allowed the US dollar to reach historic lows. Opps!
Regarding the Housing crisis and sub-prime mortgages . . . this is an area where the blame cannot be placed on government. It is 100% the fault of the financial industry. Yes, whoever was in charge, should have called it. And anyone really paying attention should have seen it. But the stupidity of providing the NINJA and LIAR loans to people is way beyond what anyone who supported greater housing opportunities for the poor had in mind.
But if anyone wants to cast the blame on one party or the other, it is important to realize that as late as mid-2007, the GOP was touting the boom in real estate as a result of their tax and fiscal policies. (I guess he who takes the credit, must also take the blame.) A big political Opps!
Wildcat, the above are all hard facts. The Energy, Taxation and Fiscal policies of the past eight years have placed our country in a very dangerous situation. And all are a result of policies enacted under GOP Presidential leadership and GOP majorities in both the House and Senate. Opps! Opps! Opps!
And unfortunately for John McCain, he has most recently been on the wrong side of the issues as he has sold out his integrity to the Republican base.
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But the above conditions are a result of the past and we need to move to the future.
The prescription or check-list for America is actually fairly simple to articulate.
First, we need to enter the 21st Century with Energy.
We must become Energy independent for the simple reason that it fuels our economy and to do otherwise results in way too much capital to exit our borders and places us at the mercy of nations, friend and foe.
If we do not have the oil reserves to fuel our economy, then we should invest every cent we have in building a new infrastructure that allows us to have a sustainable home based energy source.
(I wonder if at the turn of the 20th century, the energy chant was "Hay, Baby Hay!")
I believe T. Boone Pickens' widely circulated plan makes a great deal of sense and may be the basis for effective Energy Policy.
Second, we need to build our middle class. We must direct our economy's growth to building a middle class where a man or women can adequately support their family with good, well paying jobs.
As long as the ratio of government tax receipts are 6 to 1, individual taxes to corporate taxes (during 2006, Individual Tax Payers paid $794B in taxes; Corporations paid $132B), then in order to avoid the NEED to tax the wealthier, we must be able to build a larger middle class who can also pay more into the tax pool.
And the simple fact is that good paying jobs will come from manufacturing, particularly the manufacturing of big ticket items.
However, America has reached a tipping point where most of our large ticket consumer products are now made by foreign based manufacturers. (This may be one of the reasons trickle down economics is not effective. Too much of the trickle goes to big ticket foreign made automobiles, electronics, jewelry, clothing, shoes, accessories, etc.).
And lastly, we are not leaving our country in as good of shape as our parents left it to us. We have allowed our infrastructure to deteriorate.
. . . Bridges fall in Minneapolis, levees break in Louisiana, water systems are not being built in Georgia, etc.
We have not implemented the equivalent of Eisenhower's interstate road system. We have not built a new energy grid to handle our expanding needs. We have not invested in our schools as we should. We are allowing America to become a very expensive third world nation.
No Wildcat, I am not afraid of an Obama Presidency.
I believe he actually gets it. I believe he understands the relationship of a prospering middle class, manufacturing, infrastructure and energy.
I believe he understands that we must work together and does not try to alienate certain groups of people through divisive politics. He thinks of one America.
I believe he is thoughtful and extremely strategic in how he forms policy.
And I believe he will be open and will effectively communicate with the American people as he leads us out of our current mess and organizes our nation to reach its lofty standards.
Thanks for creating this forum.
We, in the United States of America are blessed to live in the most successful economy in the history of the world. This country's "poor" are better off than the overwhelming majority of the rest of the world's population.
Is this luck? It is very lucky for those of us who live here but what makes us different? I think it is capitalism & free enterprise. That provides the motivation to people like Tim to provide goods and services of value to their customers. The cost of government is a drag on profitability and motivation. If a business cannot be profitable it cannot stay in business.
Most solutions politicians come up with to solve the problem of the day in the headlines end up causing more problems. Sarbanes Oxley is the one that comes to mind, it is often cited as a cause of the problems in the current financial crisis. The mark-to-market rule makes businesses look worthless on paper, when there is no market for for assets that are still useful for producing income.
Politicians feel pressure to "do something" and are heros in the press when they produce legislation, but they never have to answer for the consequences, especially if they are democrats.
Boone Pickins' problem with drilling for more petroleum is that it would take too long to produce results. Democrats have said for the last 20 years that it takes 10 years for new oil wells to produce and therefor blocked exploration. Pickins says natural gas is the best choice. I wonder how long it would take to retrofit our transportation to use natural gas?
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