[StBernard] Obama and the Tax Tipping Point

[Westley Annis]

Obama and the Tax Tipping Point 

How long before taxpayers are pushed too far?
By ADAM LERRICK

What happens when the voter in the exact middle of the earnings spectrum
receives more in benefits from Washington than he pays in taxes? Economists
Allan Meltzer and Scott Richard posed this question 27 years ago. We may
soon enough know the answer.

Barack Obama is offering voters strong incentives to support higher taxes
and bigger government. This could be the magic income-redistribution formula
Democrats have long sought.

Sen. Obama is promising $500 and $1,000 gift-wrapped packets of money in the
form of refundable tax credits. These will shift the tax demographics to the
tipping point where half of all voters will receive a cash windfall from
Washington and an overwhelming majority will gain from tax hikes and more
government spending.

In 2006, the latest year for which we have Census data, 220 million
Americans were eligible to vote and 89 million -- 40% -- paid no income
taxes. According to the Tax Policy Center (a joint venture of the Brookings
Institution and the Urban Institute), this will jump to 49% when Mr. Obama's
cash credits remove 18 million more voters from the tax rolls. What's more,
there are an additional 24 million taxpayers (11% of the electorate) who
will pay a minimal amount of income taxes -- less than 5% of their income
and less than $1,000 annually.

In all, three out of every five voters will pay little or nothing in income
taxes under Mr. Obama's plans and gain when taxes rise on the 40% that
already pays 95% of income tax revenues.

The plunder that the Democrats plan to extract from the "very rich" -- the
5% that earn more than $250,000 and who already pay 60% of the federal
income tax bill -- will never stretch to cover the expansive programs Mr.
Obama promises.

What next? A core group of Obama enthusiasts -- those educated professionals
who applaud the "fairness" of their candidate's tax plans -- will soon see
their $100,000-$150,000 incomes targeted. As entitlements expand and a
self-interested majority votes, the higher tax brackets will kick in at
lower levels down the ladder, all the way to households with a $75,000
income.

Calculating how far society's top earners can be pushed before they stop (or
cut back on) producing is difficult. But the incentives are easy to see.
Voters who benefit from government programs will push for higher tax rates
on higher earners -- at least until those who power the economy and create
jobs and wealth stop working, stop investing, or move out of the country.

Other nations have tried the ideology of fairness in the place of incentives
and found that reward without work is a recipe for decline. In the late
1970s and throughout the 1980s, Margaret Thatcher took on the unions and
slashed taxes to restore growth and jobs in Great Britain. In Germany a few
years ago, Social Democrat Gerhard Schroeder defied his party's dogma and
loosened labor's grip on the economy to end stagnation. And more recently in
France, Nicolas Sarkozy was swept to power on a platform of restoring
flexibility to the economy.

The sequence is always the same. High-tax, big-spending policies force the
economy to lose momentum. Then growth in government spending outstrips
revenues. Fiscal and trade deficits soar. Public debt, excessive taxation
and unemployment follow. The central bank tries to solve the problem by
printing money. International competitiveness is lost and the currency
depreciates. The system stagnates. And then a frightened electorate returns
conservatives to power.

The economic tides will not stand still while Washington experiments with
European-type social democracy, even though the dollar's role as the global
reserve currency will buy some time. Our trademark competitive advantage
will be lost, and once lost, it will be hard to regain. There are too many
emerging economies focused on prosperity and not redistribution for the U.S.
to easily recapture its role of global economic leader.

Tomorrow's children may come to question why their parents sold their
birthright for a mess of "fairness" -- whatever that will signify when jobs
are scarce and American opportunity is no longer the envy of the world.

Mr. Lerrick is a professor of economics at Carnegie Mellon University and a
visiting scholar at the American Enterprise Institute.