With each presidential debate it struck me more that both presidential candidates are wrong about taxes: wrong both in that neither man’s proposals are realistically enactable, in that they are not the correct responses to our current circumstances, and that they suggest some basic problems with their political philosophies.
McCain wants to provide a tax cut to all tax payers — though since the vast majority of real tax dollars paid by those in the top 10% of the income spectrum, the greatest savings will be experienced by “the rich”. McCain also wants to cut the corporate tax rate to bring it in line with other developed nations. And he promises to cut spending so much that he’ll nonetheless balance the budget.
Of these, balancing the budget within four years is almost certainly not possible — both because the recession will cause tax collections to fall regardless of the tax rate and also because while congress might be persuaded to enact some or even all of McCain’s tax cuts, it will certainly not allow spending cuts deep enough to balance the budget in a recession.
Cutting the corporate tax is probably a good idea. In a recession, American businesses need every possible edge in competing and creating jobs in the global marketplace. It would cause a hit to tax revenues, but it would probably be worth it.
In regards to personal income tax, however, much as I’m in favor of lower taxes it is simply not time for more tax cuts right now. We’re no longer in the 70s and 80s, and while I’d love to see lower tax rates some day, I don’t think that our current ones are hurting the economy that much, nor that cutting them further will do much to stimulate it. While I’m a principled supporter of smaller government, I think it’s time that Republicans (if we’re to regain our reputation as the party of fiscal responsibility) cease to reflexively call for tax cuts regardless of circumstances. And pragmatically, McCain’s tax cut would stand no chance with the Democratic congress anyway, even if he somehow managed to get a convincing win.
If McCain wanted to truly show his maverick/straight talk credentials, he’d take a real bite out of the budget by proposing a system whereby those above a certain income level would pay for their medicare benefits, and perhaps even means test social security. Given that those entitlements are some of our largest budget items going forward, it would be a real step towards a balanced budget.
Obama’s proposal is, I think, both more unrealistic and more dangerous — accusations which could be leveled against many of his proposals.
Obama proposes raising taxes on those earning 250k/yr and above, and also raising capital gains tax rates (thus hitting the rich, those filing business partnership tax returns as individuals, and investors) while promising a “tax cut” for everyone making less than 250k/yr. He also promises to balance the budget by taking a “scalpel” to the budget and going over it “line by line”. (Perhaps Obama does not realize that unlike the state of Alaska, the US does not have a line item veto?)
At the pragmatic level, Obama’s tax increases will simply not work very well as a means of increasing government revenues. Those in the top 5% of the income spectrum are going to be having an especially rough year this year, and anyone who comes up with capital gains this year will have worked some pretty impressive magic on Wall Street. The health of the economy is in many ways a bigger impact on tax receipts than the actual rate — and Obama’s tax hike is not actually that large a percentage increase. So even with the higher rates, he will mainly succeed in making the investor class even more defensive than they would have been anyway. Total tax receipts will go down, not up.
Almost worse, however, to my mind is what the precedent set by Obama’s “tax cut”. You see, as of now it is already the case that roughly 50% of US citizens pay no taxes. That’s why McCain’s tax cut (which really is just a tax rate cut) gives the most benefit to those who are at the top of the income spectrum. Obama’s “tax cut” is actually a tax credit. Even if you would have already got back every dollar of income tax withholding that had been taken from your paycheck during the year, Obama’s plan would provide you with additional money back. The check for your “refund” at the end of the year would be hundreds or thousands of dollars more than the total amount that had been withheld.
Now frankly, I find it a little worrying already that half the citizens of our country pay no taxes. I don’t think that it give people much of an interest in voting for fiscally responsible politicians if they don’t actually have any “skin in the game” with regards to government spending. (In that regard, it may not be entirely coincidental that under Bush the GOP has gone from being the voice of fiscal responsibility to the party of limitless deficit spending. Under Bush’s watch, the percentage of Americans who actually pay taxes has been much reduced.) Going to a system in which the rich are taxed and not only the poor but most the middle class are actively subsidized is, to my mind, even worse. And though some may accuse me of being overly cynical, I fear that this move towards subsidizing the middle class out of the pockets of the top 5% is more an attempt to gain a larger and more permanent constituency for the Democrats among the middle class than it is a serious attempt to relieve economic adversity. I fear this may take us one more step away from “government by the people, for the people” and towards “government for the people, by the elites”.