[StBernard] America's Path To Euro-Taxes

Westley Annis westley at da-parish.com
Wed Oct 29 00:34:46 EDT 2008


America's Path To Euro-Taxes
Brian S. Wesbury and Robert Stein 10.28.08, 12:00 AM ET


It is hard to imagine that markets are not being affected by the potential
for major changes in U.S. tax policy. Sen. Obama says he wants tax rates
back where they were in 2000, while Sen. McCain says he wants to keep income
tax rates down to a maximum of 35%. With both the House and Senate under
Democratic control, Obama will have an easier time following through on his
plans than McCain.

Obama has also said he wants to push up tax rates on investment and does not
agree that corporate tax rates should be cut. Obama's proposals would not
only harm the investment landscape, but they would also make the tax system
substantially more "progressive." In particular, Obama wants to raise taxes
on "the rich," but "cut" taxes for 95% of Americans. He does this by giving
$500 to anyone who is in the workforce and earns between $8,000 and $75,000
per year. In addition, he would use tax credits to further subsidize
daycare, college and unwed (working) parents.

In many cases, these are not really tax cuts at all but spending programs
dressed up as "tax cuts." The Internal Revenue Service will send out the
check rather than some other government agency. This is a modern day version
of the negative income tax, and it would make the burden of taxes fall even
more heavily on those with higher incomes. This is hard to imagine.

In 2005, the most recent year available, the top 1% of households (by
income) earned 16% of income and paid 39% of all income taxes. The top 40%
of households earned 74% of income and paid 99% of income taxes.

These percentages surpass levels from the late 1970s, a time when the top
income tax rate was 70%. Some say that looking at only income taxes
overstates the burden on the wealthy, but when Social Security, Medicare,
corporate and excise taxes are included, the top 40% of income earners still
pay a whopping 86% of the overall federal tax burden.

Sen. Obama apparently believes that this is not enough. His tax plan would
make the system even more progressive and would push the U.S. perilously
close to the "tipping point," when more than 50% of Americans would pay no
income taxes at all.

One implication is that, in any given year, most potential voters will have
no direct stake in the federal government spending responsibly. Another is
that the federal budget will depend even more on the strength of the
economy. Periods of relatively fast economic growth will lead to soaring
revenue, while slower growth (or recession) will cause sharper declines.

The kind of progressivity proposed by Obama is not sustainable over the long
run. Policymakers hungry for revenue to finance further expansions in
government spending--like national health care or just meeting the huge
unfunded liabilities already built into Social Security and Medicare--will
eventually find that upscale taxpayers are tapped out and that the only way
to get more revenue is to tax the middle class.

After all, the government is so big that it cannot possibly fund itself just
on the rich. For example, if the U.S. government confiscated the total
wealth of the Forbes 400--a total of $1.6 trillion--it could only finance
the U.S. budget for about six months. And if it did that then it would take
away billions in charity money, such as that pushed into the Gates
Foundation by Bill Gates and Warren Buffet. So the only way to generate more
money is to tax the middle class.

One way to do that would be to introduce Western Europe's favorite tax: the
Value Added Tax. This would actually tax the middle class even more than if
marginal income taxes were raised, while making the tax code less
progressive.

In the end, it is clear that financial markets have many things to fear.
Income redistribution, like the kind practiced in France and other social
welfare states, leads the list.

Brian S. Wesbury is chief economist, and Robert Stein is senior economist,
at First Trust Advisors in Lisle, Ill.





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