Major Tax Hike on the Way

Here's the headline: "Obama's First Budget Seeks To Trim Deficit". How nice. We wouldn't want to put the words "higher taxes" in a headline about Obama, now would we?

Obama is planning to raise taxes on the "wealthy" and businesses. Apparently Obama has forgotten that we are in a recession. The administration has announced a White House summit on "fiscal responsibility." I wonder if Obama has to stop himself from laughing out loud when he says that phrase, considering he just signed the most fiscally irresponsible bill in our nation's history.  

Serious investors (i.e. those making over $250,000) will see their capital gains tax raised from 15-20% - that should really help the stock market, which has already dropped 10% in the month since Obama took office. Capital gains taxes reduce the incentive to invest. Investing is already a scary prospect - now investors have another huge reason to sit on their money, instead of using it to create jobs. Obama plans to raise total taxation by 19%. Considering the times we are in, this is economic malpractice.

As I've noted many times on this blog - taxes on corporations and small businesses hurt everyone - they don't just punish big bad business and people dressed like the Monopoly Man. Those taxes are passed down to you and I in the form of higher prices. Higher prices mean decreased demand for those goods and services, which means the companies have to lay more people off - maybe even you. 

If Obama really cared about the deficit, he wouldn't have signed a bill loaded with hundreds of billions in pork projects for Democrats in the House and Senate. This is all part of a plan to advance his health care agenda which will further erode our economy, reduce economic freedom, and introduce us to government-rationed health care. 

95%

*Updated*

Obama claims that he will cut taxes for 95% of Americans. When confronted with the fact that more than 30% of Americans don't pay any income taxes (15% more very little) and that this would require checks to be sent to these people, he modified the plan to include a "work requirement," as if it makes sense to send welfare checks (paid for by someone else, against their will) to people as long as they are working. Obama's "tax calculator" ad claims to show your tax cut under his plan vs. John McCain's. It shows no tax cut under McCain's plan for anyone making less than $250,000. This is a complete falsehood, equal to the Obama's other lies like associating McCain with Hispanic slurs, cutting Medicare and cutting Social Security.

McCain's health care plan provides a big tax cut for all Americans. Obama and Biden have done their best to distort the plan, but every independent analysis of the plan has shown that it benefits 95% of Americans. The plan provides a $5,000 tax credit to everyone who wants to buy their own health plan. A tax credit is different than a deduction. If you owed $10,000 in taxes, but bought your own health plan, you would now owe $5,000. Isn't that a tax cut?

Obama says this plan will cause people to lose their employer based insurance, but that's kind of the point. Obama either doesn't understand economics or is being intentionally misleading. Your health insurance from your employer is part of your compensation. Your total compensation is based on the value of your work to your employer and the availability of workers with comparable skills. McCain's plan would encourage many people to choose to get all of their compensation in cash and then buy their own health insurance. They would get an increase in take home pay and a tax cut.

More importantly, the Bush tax cuts are set to expire in 2010. Then 100% of people that pay income tax will get a tax increase, though Obama doesn't see it that way - he considers it the end of a tax cut. Don't you see the difference. McCain would extend the Bush tax cuts and he would eliminate the Alternative Minimum Tax, which would save working families with children ensnared by the AMT an average of $2700 a year.

Obama has also proposed raising the payroll taxes for anyone making over $94,700 a year and would raise capital gains taxes from 15% to 20%, a substantial tax increase for the 50% of Americans who own stock. And let's not forget his new taxes on businesses, which will be passed down to you through higher prices.

I guess the calculator missed a few things.

Obama and Fairness

Senator Obama promises to bring about more "fairness," in our tax code and in life in general in this country. Obama and Biden have equated higher taxes with being "patriotic" (Biden) and "neighborliness" (Obama). In an interview, Charlie Gibson noted that historically, when capital gains taxes were raised, tax revenues from capital gains fell. Obama didn't think that was important, he maintained that he would raise capital gains for "purposes of fairness." Who cares if it hurts the country? It's more fair.

Who can be opposed to fairness? Everybody wants fairness. We just might not want to go for Obama's definition. The problem is that Obama thinks equality is the measure of fairness. If you work hard and achieve success, it's not "fair" because there are others who didn't achieve the same success. In trying to correct this "injustice" Obama then would hurt everyone in his attempt to even things out. If you watch the clip, it doesn't even bother him that raising capital gains taxes would likely lower tax revenues. It achieves the goal of fairness.

Raising the capital gains tax would cause a massive sell off, driving the stock market and other investments even lower. Wayne Huizenga, the owner of the Miami Dolphins, is desperately trying to sell the team because as he told ESPN, he is trying to avoid paying higher capital gains taxes if Obama is elected. Higher taxes on capital gains discourages investment and job growth requires investment.

Obama clearly feels that the intentions of his policies are more important than the results of his policies. Consider our current financial crisis, triggered by Democratic policies intended to help people with poor credit buy houses. Obama sees nothing wrong with how his party handled Fannie Mae and Freddie Mac, viewing the intended social goal as more important than the result: massive destruction of wealth that could trigger a global recession.

Results are more important than intentions. Freedom is more important than "fairness."

Obamanomics

With the war in Iraq going much better, the economy has become the key issue. Before the Republican convention, voters preferred Obama on the economy by 16 points. Now it's nearly tied. Boston Globe columnist Jeff Jacoby on some reasons why:

Obama claims his proposal would lower taxes for 95 percent of Americans, but well over 43 million tax returns, one-third of all those filed, already reflect an income tax liability of zero. In fact, Obama says, his plan would eliminate income taxes for an additional 10 million taxpayers. What he is really proposing, therefore, is not tax relief but a bald transfer of cash - $1,000 per family, he pledges - from the wealthiest Americans to everyone else.

Why only $1,000? Why not $10,000? Wouldn't that help the economy even more? What is the "fair share" the rich must pay, Senator Obama? The top 1% of earners already pay 40% of all income taxes.

Obama also favors increasing the capital gains tax from 15% to 20-25%. Obama argues that we had robust growth during the Clinton administration when the tax rate was 28%. This is misleading because we saw better economic growth after the rate was cut to 20% in 1997.
Obama doesn't favor increasing the capital gains tax to increase tax revenue, but because of "fairness." From a primary debate with moderator Charlie Gibson (Youtube video):

Gibson: "In each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"

Obama: "Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness."

Wow. McCain would leave the capital gains rate alone and favors lower taxes for all Americans, including the "rich," who are typically small business owners who are creating jobs for other Americans and producing goods and services we enjoy.

Tax Cuts for the Rich

Here are the new figures on the distribution of income taxes for 2007. Ever wonder why Republicans continue to propose "tax cuts for the rich?" Maybe it's because they are the only ones paying taxes.

In case you can't read the graph, the top 1% pay 39% of all income taxes, 2%-5% pay 20%, 6%-10% pay 11%, 11%-25% pay 16%, 26%-50% pay 11% and the bottom 50% pay just 3%. The top 50% pay 97% of income taxes! What is there to stop the majority who pay little in income tax from voting to increase taxes on those making more? Politicians then use that money to transfer it to the bottom 50%, effectively paying them for their votes.

Whenever the media talks about tax cuts they show how much top earners save compared to the pittance received by the low earners, but they never show how much those people pay to begin with. Bush's tax cuts reduced the middle fifth's effective tax rate from 5% to 2.9%. They got a much larger percentage cut than the richer tax payers, but the total amount saved was much smaller.

Bottom line: to cut taxes, you have to cut taxes for the rich (who provide almost all the jobs, by the way) or you won't have much of a tax cut.

Obama Flexes His Economic Muscles

In the face of rising gas prices Obama has gone into knee-jerk liberal mode and is calling for a "windfall profits" tax on the oil companies. Obama would dramatically increase the taxes on oil companies when the price of oil exceeds $80 a barrel (oil prices will probably be above $80 a barrel for the foreseeable future). Jimmy Carter tried this and it failed miserably.

Oil is a commodity that is produced around the world (where liberals haven't prevented drilling and the building of refineries) and is sold at market rates. That market rate is determined by the supply of oil and the demand for that oil. World-wide demand for oil (especially from developing countries) has dramatically increased over the last decade and the dollar has declined in value, driving the price sky high. Increasing taxes on the oil companies will reduce their incentive to bring more oil to market, driving prices even higher. Oil companies make a lot of money when the price of oil goes up because their stock pile becomes more valuable. However, they do not set the prices. ExxonMobil, although it is a huge company, is only the 14th largest oil company in the world. They can't set the price for oil any more than a big dairy farmer (that's for you, Polinders) can set the price for milk. OPEC, on the other hand, is a cartel that can and does influence the price of oil by agreeing on how much oil to produce.

Oil company profits cost you about 9 cents a gallon. Taxes (federal, state, local) cost you around 40-50 cents a gallon (who is gouging who?). Obama thinks this isn't nearly enough. He disguises a big tax hike by pretending he's just getting even with the evil oil companies. Who do you think will pay for the tax increase? The oil companies will pass it on the consumer by charging more for gas. McCain is calling for a reduction in the federal gas tax for the summer (it would be nice if he also favored drilling in ANWR). This would actually lower the price you pay at the pump, but Obama opposes it because, well, because it's a tax decrease instead of an increase.

Ah, the classic liberal vs. conservative debate: more government or less?

Refuting the Income Gap

The Wall Street Journal is reporting on a new study on American incomes between 1996 and 2005 conducted by the Treasury Department. Guess what? It doesn't give much credence to the populist, class envy messages that we've been hearing from the likes of John Edwards, Mike Huckabee, and Warren Buffet about a supposedly growing income gap.
The study examined the tax returns of 96,700 people over a ten year period. It showed that the poorest quintile actually saw the most growth (yes, adjusted for inflation) - their incomes were 90.5% higher in 2005 as compared to 1996. As the graph on the left shows, the poorer you were, the more income growth you had in the last decade. The top 5% actually saw their incomes drop 6.8%. In an impressive showing of upward mobility, 58% of those in the bottom quintile in '95 moved up at least one quintile. These data are even more impressive given the huge numbers of low skilled immigrants that have entered the economy in the last decade. The American dream appears to be alive and well. How should this data affect our view of the "income gap?"

All of this certainly helps to illuminate the current election-year debate about income "inequality" in the U.S. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn't remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.
The great irony is that, in the name of reducing inequality, some of our politicians want to raise taxes and other government obstacles to the kind of risk-taking and hard work that allow Americans to climb the income ladder so rapidly. As the Treasury data show, we shouldn't worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.

The Income Gap

Billionaire Warren Buffet is saying that he wants to be taxed more, saying that our current income tax rates are not progressive enough: "The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It's dramatic; I don't think it's appreciated and I think it should be addressed." Buffet makes most of his money investing. Capital gains are taxed at a lower rate than the top income brackets. Low taxes encourage investment and economic growth, high taxes hurt investment and economic growth (and abortion groups that depend on Buffet's handouts). I am mystified at how the tax system is "tilted" toward the rich. The fact is that the richest 1% pay 37% of all income taxes! The bottom 50% only pay 3.3%! I think our tax system punishes achievement quite enough. But wouldn't taxing the rich more close the "income gap?" The media has recently sounded the alarm that the income gap is growing. A growing income gap is a good thing. That means the economy is growing. Everyone benefits from that, only the rich benefit more, because they have more money invested in the growing economy. If we punish them with higher taxes, they will be less likely to take risks with their money. Think of a small business owner with a new product he's excited about. Should he take out a second mortgage on his house in order to afford more employees? Higher taxes means a smaller potential payoff should he succeed, making him less likely to take on the risk. The income gap talk is nothing more than stirring up class envy.

Taxing the Rich

A recent New York Times article makes the tired liberal argument that the rich do not pay "their fair share" of taxes. The American Thinker rejects this argument based on actual IRS statistics. About half of tax returns are for people making less than $30,000 (Adjusted Gross Income). They pay between 3.5-4.5% in taxes (maybe a $1000 a year). Those making $200,000 (AGI) or more make up 2.7% of the population, pay over 20% (at least $40,000 a year) in taxes and contribute 51% of all income taxes. Sounds like more than their fair share to me. The top 2.7% pay at a minimum 40 times as much as the bottom half. Doesn't it follow that the ones paying the most tax should benefit the most from tax cuts? It would be nice if the left would stop trying to use class envy to get votes.

Fat Cats

The stock market, after soaring in recently, had a rough week. However, the DOW is still above 13,000 and GDP is up 3.4% for the second quarter, the best quarter in over a year. The media, in their quest for doom and gloom always choose to play up the bad news (ht Newsbusters.org), at least when a Republican is in office. But why should they pay attention to the stock market at all? I thought only the fat cats on Wall Street were affected by the market. How many times have we been told that the gains on Wall Street are not being shared by those on Main Street? Democrats are making plans to "tax the rich" by increasing the capital gains tax. Increasing the capital gains tax will lower overall investment, hurting the stock market and the economy. The average Joe depends on the stock market's performance for at least his retirement account. The Democrats can't seem to get it through their heads one simple fact: Low taxes = good for economy, high taxes = bad for economy. I guess it doesn't matter if you can take money from one group of people and giving it to another to buy votes.

Global Warming Update

Every hurricane, ice berg or warm breeze nowadays is attributed to global warming. However, in April the average temperature was only 51.7 F, -.3 degrees cooler than average for the last century. We should all immediately buy Hummers, fly private planes and jack up the AC if we want to avoid an ice age that will surely wreck havoc across the globe. I'd say we only have about 5 years to act, or else the planet is doomed. Seriously, more and more prominent climate scientists (thanks, Drudge Report) are changing their tune and rejecting the doom and gloom prophesies, while the nut jobs at Greenpeace build an ark. As I've stated before, I strongly support conservation and investment in technologies that will lower our carbon dioxide emissions. However, global warming is not a crisis (see my previos posts) and the extreme solutions (Kyoto Protocol, insane taxation, limiting the number of children you can have) offered to solve this non-crisis would have horrible effects on our economy and the welfare of the developing world while doing next to nothing to cool the planet. Obama and Hillary have joined other Dems in the Senate to propose a new $366 billion a year global warming tax, which would average $4,500 for a family of four and would increase over time. Awesome.

Taxes

In honor of tax day I'm sharing a parable about tax cuts that has spread around the internet. Democrats are fond of saying that any tax cut mainly benefits the rich. There's more to the story...

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing. The fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12 and the ninth $18. The tenth man (the richest) would pay $59. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." So, now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes. So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share'? The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat their meal. So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so: the fifth man, like the first four, now paid nothing (100% savings). The sixth now paid $2 instead of $3 (33% savings). The seventh now paid $5 instead of $7 (28% savings). The eighth now paid $9 instead of $12 (25% savings). The ninth now paid $14 instead of $18 (22% savings). The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man "but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than me!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being successful, and they just may not show up at the table anymore. There are lots of good restaurants in Europe and the Caribbean.