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Monday, July 28, 2008

Obama's Fuzzy Math and Curious Economic Policy

Barack Obama updated his economic policy today.

Barack Obama will raise taxes on families making $250,000 or more but pledges that anyone earning $150,000 or less will get a tax cut under his proposed budget plan.

The presumptive Democratic presidential candidate told FOX News that he defines the middle class as anyone making under $250,000.

“What I would say is, if you are making more than $250,000, than you’re more than middle class. You’re doing better. If you are making less than $250,000, then you are definitely somewhere in the middle class. And if you’re making $150,000 or less, than I think most Americans would agree that you’re middle class. So that’s why the fact that if you are making less than $250,000, you will not see your taxes go up under an Obama administration,” Obama said in an interview taped in London on Friday and aired on FOX News on Monday.

This is an updated on his policy which used to promise a tax cut to anyone making $75,000 and less. That said, there is a lot here and first of all, saying that anyone making $150,000 or less is "middle class" is far too broad a statement. If you are single individual living in Lincoln, Nebraska and you make $149,000 per year, you are definitely upper class. In New York City, you would be more like middle class.

First off, so called targeted tax cuts, where one group gets a tax cut and another gets a tax increase, is a tax policy sure for failure. It certainly works if you are attempting good political class warfare but it is doomed for failure as a policy. It is those making over $250,000 per year that drive jobs. Those are the entrepeneurs and business owners. While the rest of the population may cheer when they see the super wealthy get theirs, it won't help spur the economy to punish them.

Furthermore, not only is his plan misleading but it doesn't add up. First, he plans on increasing the capital gains tax. Currently, more than half the population is invested in stocks. All of those folks will see an increase in those taxes. Second, he plans on re introducing the death tax. This is a tax on any estate worth one million or more dollars. If someone invested $50/month for forty years and earned 12% return annually that would net over one million dollars. Both of those taxes would hit a lot of people making less than $150,000.

Second of all, there is no way to sustain this tax without suffering obscene amounts of deficits. Obama plans on introducing universal health care, mortgage relief, extended joblessness benefits, and more government spending on so called "green jobs", to name a few of a plethora of new government spending. We are talking trillions of new dollars yearly in government spending. Please note, Iraq only costs about $120 billion yearly. Most of this spending would have to come from increased taxes. The idea that Barack Obama will be able to achieve a trillion new dollars in spending while promising to also lower taxes on everyone but the super rich is pure fantasy.

Furthermore, while he is promising a tax break on everyone but the super rich, he also promises a tax increase on capital gains, as I already mentioned, and corporate tax. Our corporate tax rate is already the second highest in the world. By making it unattractive for corporations to do business here, he will only drive jobs away. This increase along with the increase in capital gains tax will make it very unattractive for capital investment in the country.

The problem with Obama's economic plan is that it is entirely rooted in a populist POLITICAL message. It is NOT rooted in good policy. On a political level, it makes all the sense in the world to bleed the super wealthy dry along with the corporations. It makes even more sense to promise a tax cut to everyone else. Furthermore, you top it off with promises of major spending increases and you have a policy that most economically illiterate Americans find attractive. Of course, you top it off with a nebulous but good sounding term like this just to make it seem plausible...

Obama said the massive budget deficit and investment in infrastructure he wants to make require changes to the tax code.

I am all for changes in the tax code depending on what they are. That said, just because he says doesn't mean they will happen or even more they will work. The tax code is big giant maze of confusion and sophistication from passive income, dividends, gains, etc. Changes in the tax code are a good idea depending on what they are. On the other hand, a sure fire way of knowing that someone has no idea how to really change the tax code is if they merely say they will change the tax code without specifying how. That's exactly what Obama did here.

The so called bottom to top economic growth that Obama is featuring has no chance of succeeding if he punishes the drivers of economic investment at the same time he rewards economic consumers. What this plan will amount to is an increase in consumer spending at the same time business investment is decreasing. That is the sort of economic growth that is not sustainable. Investment is the driver of any capitalistic system. Obama's plan punishes that exact activity.

Only those that have no economic education whatsoever would believe that Obama can pull off a plethora of new spending while at the same time only taxing the super wealthy. On those with no economic education would believe this sort of policy would create the economic expansion necessary. Of course, unfortunately that pretty much covers most Americans.

1 comment:

Anonymous said...

There are some of us here who may not be ecomonists but understand that what Obama proposes is the exact opposite then the economy needs right now. Just as you reported, driving up taxes on business forces a decrease in employment (layoffs) or complete close downs. No matter how anyone feels about the rich, we need them just as much as they need us.