Until last weekend, Barack Obama was the first Presidential candidate since Walter Mondale to promise unequivocally that he will raise taxes. On Sunday, that promise reached its expiration date. He told ABC that his proposed tax hikes for “the rich” will be postponed if the economy is in recession next year.
Democrat Barack Obama says he would delay rescinding President Bush’s tax cuts on wealthy Americans if he becomes the next president and the economy is in a recession, suggesting such an increase would further hurt the economy.
Nevertheless, Obama has no plans to extend the Bush tax cuts beyond their expiration date, as Republican John McCain advocates. Instead, Obama wants to push for his promised tax cuts for the middle class, he said in a broadcast interview aired Sunday.
“Even if we’re still in a recession, I’m going to go through with my tax cuts,” Obama said. “That's my priority.”
What about increasing taxes on the wealthy?
“I think we’ve got to take a look and see where the economy is. I mean, the economy is weak right now,” Obama said on “This Week” on ABC. “The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers, indicates that we're fragile.”
“Obama Tax 3.0”, as the Wall Street Journal labels it, makes economic sense but contradicts what Democrats have been telling us for the past several years. Speaker after speaker at their Denver extravaganza declared that the country is already sunk in a state of unprecedented misery, for which a major culprit was “Bush’s tax cuts for the rich”. Now the Democratic candidate says that curing the economic malaise requires keeping its alleged cause intact.
The Journal generously opines that Senator Obama’s change of heart shows an improving grasp of the effect of taxes on the creation of wealth. Maybe, but to my eyes it’s more like flailing. Raising taxes isn’t popular, even if only a small percentage of taxpayers are directly affected. President Clinton discovered that in 1994. The lesson didn’t matter to Slick Barry so long as he was The Inevitable One. Now, feeling less confident, he blurs the punitive side of his tax program.
He insists, however, that the benevolent side, the “middle class tax cuts”, will go forward, without mulcting “the rich” to offset them. Implicitly, then, he rejects the Democratic Party dogma (enacted as the “pay-go rule”) that all tax reductions must be “paid for”. If sincere, that is a welcome shift toward the GOP position, but one need not be a hardened cynic to doubt that a Democratic President and Democratic Congress will follow through. In the same interview, Senator Obama declares that extending EGTRRA tax relief, as John McCain advocates, will “blow a hole through the budget”. How will an Obama Administration avoid the same “hole”? Once the election is safely over, tax relief for the middle class is almost sure to go the same way as Bill Clinton’s similar promise in 1992.
If the income tax cuts do materialize, the middle class will be little, if any, better off. Weighing against them will be the candidate’s proposed corporate tax increases, which he hasn’t yet suggested be put on hold. As Ronald Reagan once remarked, “Corporations don’t pay taxes; they collect taxes.” A corporation is an abstraction; its tax burden falls on real people: shareholders, employees or customers. Economists disagree about the exact division of the costs, but there’s no denying the impact on ordinary Americans. Shareholders consist largely of pension funds and other retirement plans. Joe Sixpack’s 401(k) account pays part of ExxonMobil’s taxes. Workers and consumers pay the rest in the form of lower wages and higher prices. U.S. corporate tax rates are already among the world’s highest; the Obama program would make them worse.
Also painful for the middle class, needless to say, will be the Obama anti-energy mania, keeping all cheap and practicable sources off-limits while squandering capital on a government-mandated switch to expensive alternatives.
Discussing tax policy in terms of “the rich” versus the rest is in any case far off the mark. The income tax system is already steeply progressive. As of 2006 (the latest year for which data are available), taxpayers with 30 percent of the nation’s income paid 60 percent of all income tax. Their average tax rate is over 20 percent. Meanwhile, the bottom 50 percent of the taxpaying public endures an average income tax rate of three percent. Given those numbers, politicians who want to be solicitous of the middle class need to look elsewhere: to corporate taxes, as noted above, or to payroll taxes, which last year produced $180 billion more in Social Security revenue than was paid out in benefits. Republicans have at various times proposed channeling some or all of that surplus into personal retirement accounts. Democrats, preferring that the government spend the money, have been adamantly against.
The best that one can say about candidate Obama’s tax ideas at this point is that he is not so much in favor of “soaking the rich” as confused about the whole subject. Well, maybe that’s better than Walter Mondale.
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