[StBernard] A Very Taxing Election

[Westley Annis]

A Very Taxing Election
Barack Obama's tax plan looks a lot like George McGovern's.

By Grover G. Norquist


Soon after the primaries ended the core issue of the 2008 presidential
election shifted from Iraq to the economy. But today's debate over economic
policy does not highlight unemployment and job creation, traditional issues
that had dominated campaigns in the forty years following the Great
Depression. Nor does it focus on the politics of the "misery index" -
unemployment plus inflation - as identified by Jimmy Carter in the 1976
election. Rather, the core economic issue at the close of the 2008 election
is taxation. 

Tax policy has taken center stage in elections before. In 1980 candidate
Ronald Reagan argued for a 33 percent reduction in all individual income-tax
rates, mirroring the 22 percent supply-side tax-rate reduction of
Kennedy/Johnson in 1964. Carter stood opposed. Four years later Reagan
defended his tax-rate reductions while Walter Mondale announced at his
nominating convention that he "would" raise your taxes.

This year Obama is repeating the 1992 strategy of Bill Clinton. He is
promising middle-class tax cuts - $500 per working adult - along with tax
increases for a minority of higher-income citizens.

The Republican critique of the first half of the Obama tax plan is that the
$500 tax rebate will go mostly to those who pay no income taxes. In essence,
it's a $500 welfare check, or half the $1,000 payment George McGovern
promised to every citizen in 1972. Welfare spending, Republicans argue, is
not a tax cut. 

The critique of the second half of the plan is that Obama's tax increases
will negatively affect a lot more than the top 2 percent of income earners.
For starters, they will take a big bite out of America's household
retirement savings.

When Reagan was elected president in 1980 only 20 percent of adults owned
stock directly. Today more than 50 percent of households own stock through
their 401(k)s, mutual funds, and IRAs. The tax implications of this
demographic shift are significant. In 2003, the capital-gains tax rate was
reduced from 20 percent to 15 percent and the tax rate on dividends was
lowered from 35 percent to 15 percent. In the two years that followed, the
Dow Jones rose from 8,000 to 10,400, directly increasing the value of all
those 401(k)s. But Obama, along with the Democratic Congress, is poised to
allow the 2003 tax cuts on dividends and capital gains to expire, thus
risking a reduction in the value of all those 401(k)s. (The recent stock
market collapse has Americans all that more focused on the size of their
retirement accounts.)

Meanwhile, Joe the Plumber has focused attention on Obama's plans to raise
taxes on individuals earning more than $250,000 a year. This is no mere tax
on the rich since many small businesses pay taxes at the individual rate.
Obama's camp says they will target only 2 percent of small businesses in a
given year. Economists point out, however, that of the $700 billion in
small-business earnings this year, $420 billion - or 60 percent - was
generated by businesses earning more than $250,000. That's a whole lot more
than 2 percent.

Obama's taxes also have a way of adding up. He has called for raising the
top marginal tax rate on individuals and small businesses from 35 percent to
39.6 percent. Added to that will be a tax of 12.4 percent on Social
Security, which is now capped at $102,000. This will create a top tax rate
of 54.9 percent. (Self-employment profits also will face a 2.9 percent
Medicare tax.) Adding in the average state income-tax rate, Obama's top tax
rate on small businesses and individuals climbs to about 60 percent. Compare
that with Russia's top tax rate of 13 percent, Hong Kong's of 15 percent,
France's of 49.8 percent, and Sweden's of 56.5 percent.

But Joe the Plumber stands for much more than the economics of
small-business job creation and capital formation. He represents our
aspirations. Joe doesn't earn $250,000 a year. This is what he hopes to
earn. In this light, Obama's glass ceiling on small-business earnings looks
a lot like George McGovern's suggestion in 1972 that all earnings over
$500,000 be taxed at 100 percent. That plan gained unexpected opposition
from blue-collar workers who, when asked if they earned anything like
$500,000, replied, "No, but I might someday."

Of course, Obama is going to take more of Joe the Plumber's future earnings
not to pay for roads and the military, but to redistribute to others.

The economists writing Obama's tax plan look at one set of numbers and think
they're scaring only a few high-income voters. In truth, the Obama tax plan
should frighten the half of American households that have their lifetime
savings in the stock market and the 25 million small-business owners who do
not earn $250,000 today, but hope to in the future. As Langston Hughes
wrote, a dream can dry up like a "raisin in the sun." A whole lot of dreams
are poised to dry up if the vote goes Obama's way on Tuesday. 


- Grover Norquist is president of Americans for Tax Reform and author of
Leave Us Alone - Getting the Government's Hands Off Our Money, Our Guns, Our
Lives.