President Obama's election year messaging is all about class warfare. Worse, under this guise, his recent budget submission makes it clear he plans to dramatically penalize savings and investment through the tax code. Since incentives matter, taxing something produces less of it for the same reasons subsidizing something yields more of it. Given that axiom, one is forced to conclude the president thinks we have too much savings and investment in the U.S. economy today. Hence his draconian proposal to increase the tax on capital gains from 15 percent to nearly 24 percent and to nearly triple taxes on dividends from 15 percent to 43.4 percent.
What is his intellectual rationale? It's hard to figure since, as Cato economist Dan Mitchell points out, "every single economic theory--even Marxism and Socialism—agrees that savings and investment are key for long-run growth and higher living standards. " And yet his budget also out-colors the rosiest of economic scenarios by predicting the economy will grow 3.6 percent in 2012 and 4.4 percent in 2013. As policy expert Michael Tanner stresses, this seriously outpaces estimates by private forecasters and is faster than the economy has grown coming out of the last five recessions. The only thing more absurd than the president's economic growth estimates are his unemployment projections—and that is saying something.
The president justifies his attack on savings and investment by claiming he is doing so to fix some great injustice in the U.S. tax code. While there are certainly glaring mistakes that need fixing in the code, a bias in favor of savings and investment sure isn't one of them. As this report, which Ernst and Young released this month, concludes and Mitchell emphasizes, "the United States already has one of the most punitive tax regimes for saving and investment.”
Maybe the president is doing this because he does not believe the U.S. code is progressive enough? That claim also does not withstand scrutiny. Despite breathless assertions to the contrary by Jonathan Chait from New York magazine and Paul Krugman of New York Times fame, the United States has one of the most progressive income tax systems among industrialized nations, according to a 2008 report from the Organisation for Economic Co-operation and Deveklopment. In fact, by one measure, we have the most progressive system.
The professional Left is so invested in claiming the contrary that Chait and Krugman have tried to double-team Mercatus scholar Veronique de Rugy for, well, reporting the facts. Luckily, as a free-market economist with a Ph.D. from the Sorbonne—possibly making her a subset of one—she doesn't intimidate easily. And, as Clive Crook at the Atlantic proves, there still are some impartial arbiters.
On the topic in question, De Rugy is right and Chait is wrong. Income taxes in America are more progressive than in other rich countries – according to an authoritative official study which, to my knowledge, has not been contradicted… Before you ask, this ranking takes account of employee-side payroll tax as well as the federal income tax.”
Any objective examination of the data shows that the root cause of our current fiscal woes is far more accurately put at the door of excessive spending than inadequate taxation. While it is true that revenues as a percent of GDP have fallen somewhat during this prolonged economic downturn, they are projected to climb above the long-run average of 18 percent by the end of the decade (even if the Bush tax cuts are made permanent). Both Republicans and Democrats bear the blame for the dramatic increase in spending since it began under President Bush. To be sure, a Democratic Congress was happy to join this taxpayer-funded party and the Obama administration has continued the pattern of profligacy.
Aided and abetted by a Democrat-controlled Senate that doesn't even pretend to meet its fiscal responsibilities, the United States is on the brink of bankruptcy. Under the president's budget, in Fiscal Year 2013, the federal government will spend almost $4 trillion dollars, and by 2022 we will be paying about $1 trillion annually in interest payments alone. The most important point upon which Americans should focus, though, is that under Obama's plan, even with its absurd economic assumptions, the budget never balances.
Perhaps that's why a poll done earlier this month by The Economist showed that 50 percent of Americans prefer the deficit be addressed by cutting spending, far out-pacing those who favor tax increases and 17 points higher than those who want a combined approach. In fact, an ABC/Washington Post poll done during a similar time period revealed that on the question of whether taxes should be raised on Americans who sell stocks and bonds, fully 70 percent of Americans prefer either no change or for the rate to be lowered. So the president may be pitching class warfare, but it isn't clear the public is buying it. Caveat emptor, indeed.
- See a collection of political cartoons on the budget and deficit.
- Check out the U.S. News Economic Intelligence blog.
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Corrected 2/24/2012: A previous version of this article mischaracterized the percentage of Americans who do not believe taxes should be raised on Americans who sell stocks and bonds. Seventy percent of Americans prefer that there either be no change to the tax rate or that it should be lowered.