Obama's Soak-the-'Rich' Tax Hikes Are Worse Than the Fiscal Cliff

We should worry about Obama's class warfare, not the fiscal cliff

454

By Daniel Mitchell

, Fellow at the Cato Institute

November 16, 2012

About Daniel Mitchell:

Daniel Mitchel is a fellow at the Cato Institute.

America actually will fall off two fiscal cliffs in January, but only one of them is bad. The good fiscal cliff is the so-called sequester, which is the inside-the-beltway term for automatic spending cuts. These aren't really spending cuts, just reductions in the growth of spending. If the sequester takes place, total federal spending will climb by $2 trillion over the next 10 years instead of $2.1 trillion.

But anything that restrains the growing burden of government spending is a good idea, so a small step is better than nothing.

[See a collection of political cartoons on the fiscal cliff.]

The bad fiscal cliff is the automatic tax hike, which exists because the 2001 and 2003 tax cuts are scheduled to expire at the end of the year. This means higher tax rates for all taxpayers, as well as increased double taxation of dividends and capital gains.

That would be bad news for the economy, but it also would be terrible fiscal policy since politicians would have very little incentive to control budgetary waste if they expect more revenue.

But even though that fiscal cliff would be bad news, it's not the worst possible outcome. President Barack Obama has proposed a class-warfare plan that would repeal the sequester and maintain—and exacerbate—the tax hikes on the so-called rich.

At the risk of making a lame joke about a very serious topic, this is the make-America-more-like-France fiscal plan. We give up the only bit of spending restraint that was included in the 2011 debt limit agreement and we get a bunch of tax increases that undermine growth and competitiveness.

[See a collection of political cartoons on the budget and deficit.]

But it gets worse. Obama wants to double the size of the soak-the-rich tax hikes, thus maximizing the potential harm to job creation. In other words, not just the automatic tax increases, but then additional tax hikes on top of that—all designed to penalize success and innovation.

If Obama prevails, he'll be rewarded for dogmatism, but he won't find a pot of gold at the end of the class-war rainbow. Successful taxpayers will adjust their behavior in ways that reduce taxable income, which means the government won't get much money even though it will impose a lot of damage.