Peter Ferrara

Barack Obama’s supposed tax cut for 95% of American workers is meant to draw attention from the real core of the Obama tax plan – proposed increases in every major federal tax:

--Obama proposes to raise the top two individual income tax rates by 25% or more, both through explicit rate increases, and the phaseout of personal exemptions and all itemized deductions for these upper income earners;

--Obama proposes to increase the capital gains tax rate by 33%;

--Obama proposes to increase the tax rate on dividends by 33%;

--Obama proposes to raise the top payroll tax rate by between 16%--32%;

--Obama proposes a new payroll tax on employers to help pay for national health insurance, estimated at around 7%;

--Obama proposes to reinstate the death tax, which is being phased out under current law, with a new top marginal tax rate of 45%;

--Even though American companies already face the second highest marginal tax rates in the industrialized world, Obama’s tax plan provides for increasing the corporate tax burden by another 25%, “by closing corporate loopholes and tax havens”;

--Obama’s protectionist trade policies even suggest higher tariff taxes.

It’s the Incentives, Stupid

Obama argues that only higher income workers and rich corporations will suffer these tax increases, and they can afford it. But tax and economic policy is not about who “can afford it”, an uninformed and socially retrograde sentiment. It is precisely the increase in these marginal tax rates that greatly harms the economy, because the incentives are turned against savings, investment, entrepreneurship, business expansion, job creation, work, and economic growth. With higher marginal tax rates, the reward for these pro-growth economic activities is reduced, and so these activities decline.

These incentives affect not just higher income people, and all the resources they control, and corporate employers and all their capital, and small businesses who would suffer the individual income tax rate increases. They also affect everyone who plans to be in these upper income precincts someday, or who strives to get there, or who may be trying to gain capital investment from people with money for their own small business, like Joe the Plumber, or who is looking to get a job, which usually only comes from business people with money. Through the effect of these incentives throughout the economy, everyone will be harmed by Obama’s tax increases.

Peter Ferrara

Peter Ferrara is a senior fellow at the National Center for Policy Analysis and a Senior Fellow at the Heartland Institute.