McCain Will Raise Your Taxes, Obama Will Raise Your Income

Americans now pay less in taxes than at any time since WWII. The low tax rate, in effect for eight years now, has not produced anything resembling general prosperity.

Republican economic policy holds that lower taxes will increase government revenues by stimulating economic growth. That has never happened, and we have tried it twice now, with Reagan and Bush 43. The result has been increasing national debt.

The income tax was enacted under the authority of the 16th Amendment in 1913. The progressive rate tax, a system under which higher incomes are taxed at a higher rate, was always a part of the system. Prior to the Great Depression the top rate was 25%. It was raised during the Depression and for the war years and after to the vicinity of 70% - 90%. Over the years the top rate has been as high as 70%-91% for more time than it has been low 25%-39%.

In 1981 Reagan raised the bottom rate from 10% to 15% while lowering the top bracket from 70% to 50%. The top rate was lowered again in 1986 to 28%. The result was a huge run up in the national debt because the theoretical economic growth that would have generated increasing revenues didn't happen.

Bush 41 raised the top tax rate to 35%, the famous "read my lips" tax increase. Clinton managed to balance the budget mostly by raising the top bracket to 39% from 35%. Bush 43 reinstituted the 10% bracket and reduced the top rate to its current rate of 35% from 39%. The result, deficit spending and a burgeoning national debt. The growth it was supposed to generate did not happen.

Nearly all of the legislation passed to lower taxes had titles similar to Economic Recovery Tax Act. In the chart below though, you can see that all of that tax lowering has had no consistent effect on the Gross Domestic Product. The one period, circa 1982, that it does seem to show an effect must be put in the context of hyperinflation. The median tax rate spiked because salaries were indexed to inflation, growing, and taxes were not indexed, adjustments were made. Higher median taxes can't be meaningfully interpreted as a cause for the GDP downturn separate from oil shocks and hyperinflation.

Tax rates and GDP growth - source U.S. Bureau of Economic Analysis

In addition to an increase in national debt, Americans, 80% or so, are so strapped due to declining incomes that the prospect of a tax increase is a serious issue. So retiring the national debt or even balancing the budget seems out of reach without draconian cuts in government services. And making those cuts will not improve the economy. Any substantial curtailments in government programs will only make life harder for a majority of Americans.

Who's debt is it?

When you put a purchase on your credit card and pay over time you end up paying more for the item in the end. Deficit spending then increases the cost of government and is therefore an indirect tax increase. So deficit spending is a tax increase whether you chose to call it that or not.

What is not clear to many is why taxes do not hurt the economy. It seems intuitive enough that they would, but in historical ranges they do not appear to have done so.

The simplest explanation is that when you pay taxes you are buying something, the services of the government, and in order for them to perform those services they, in turn, buy goods and labor from the same market as do you. So taxes are, ideally, immediately recycled into the economy, no different than if you bought the same services from a private company. The only difference then is that buying from the government is compulsory. That fact is what the argument is really all about. The idea that taxation harms the economy has always been baseless and simply a cover for disputing the existence of specific government programs.

So if taxes are economically neutral and deficit spending is just another way of raising taxes then why worry? One problem is that we are increasingly borrowing from foreign sources and when we are paying interest on our debt that money is removed from our economy. The other is the little examined reality that concentrations of wealth effectively remove money from the economy too. Instead of being in circulation, in the form of direct business investment or funding consumer spending, wealth is increasingly chasing into speculative bubbles in stocks, commodities and foreign currency or foreign banks for sheltering. This damages the economy, reducing revenues, leading to more deficit spending.

McCain vs. Obama

Both McCain and Obama will have to raise taxes to pay for programs for which the public is clamoring, whether those programs are universal health insurance, expanding the military, trying to retire the national debt, or simply trying to balance the budget.

McCain proposes to increase your tax exemption for children by something like $125/year. That's it, if you have children you get something, otherwise not. This will increase the deficit.

McCain proposes a $2500-$5000 "refundable" tax credit for the purchase of health insurance while apparently proposing, as I understand it, eliminating the deduction for employer provided health insurance. This is a tax increase for business to pay for a tax benefit to the public. This is, ostensibly deficit neutral.

McCain will cut the corporate tax rate from 35% to 25%. This is proposed to keep American companies on shore and to stimulate the economy. This will not keep companies on shore because the 10% tax savings on profits is miniscule compared to the as much as 80% operating cost savings of exploitation of cheap foreign labor. And since most corporations do not pay any taxes due to loopholes it is ridiculous. All that will happen is that those that are paying taxes domestically will pay less and increase the deficit.

All of this tinkering with tax cuts will result in a net tax increase because a higher percentage of the operation of government will be placed on your credit card.

Obama's plan, a tax cut for the middle class, should be offset by rolling back the Bush 43 tax cuts for the wealthy. Curtailing tax loopholes for companies operating offshore will have far reaching effects including reducing the deficit. As far as funding for new programs goes, there is little doubt that these, like universal healthcare or improving public education and tuition programs, will go on your nation's credit card.

What's in it for me? After all, I'm paying for it.

Your taxes are going to go up with either Obama or McCain. For whom you vote, if that is your issue, depends entirely on how much they will go up and/or what you will get in return.

McCain's plan resolves to further increasing the deficit and putting more on the credit card without any material increase in services from the government. Essentially making government more expensive without any increase in benefit.

Obama's plan balances a modest tax break for the middle class with a upper income tax increase. Our government "credit card" debt will not increase if we do not adopt any sweeping new social programs. Current operations of government will then not be increasing in expense because we are not increasing the financing of them.

Obama's plan to close tax loopholes for companies operating offshore is probably the most important initiative of this era. It would recapture revenues and decrease the deficit, possibly even funding new programs. We shall see.

What is in it for you is this. For thirty years the U.S. government has been pulling the wrong lever in an effort to aid economic growth. Taxes do not make any difference unless and until they are too low to meet expenditures or so high that cash is languishing in government coffers. Debt interest, because it increasingly is paid to foreign holders of our debt, is lost to our economy. So in this global financial climate, taxes are economically neutral if they meet current expenses and economically damaging if they do not.

So what is the right lever to pull?

Raise the top tax rate to more historic norms. Plain and simple, excessive concentrations of wealth tend to remove money from the economy, like interest on foreign debt. We have seen commodity markets being skewed by over speculation and big money chasing the safe/high return investment du jour. Artificially inflated markets do no one any good as the underlying demand will not support unrealistic prices. The money invested in these bubbles will be lost as surely as there is gravity. This is the ultimate tragedy of the "trickle down" philosophy, money that could have put more kids through college or could have funded national healthcare is just going to be lost in a series of speculative bubbles.

Increasing access to higher education and increasing quality in public education are the right levers. A universal healthcare system that would cost the public and industry half of its current burden is the right lever. And if the cost of these programs is put on the credit card then there is some credibility to the argument that the increased cost of financing will have been worth it to the American people. Lowering tax receipts in the face of widening deficits is actually worse than doing nothing.

Finally, getting Americans a raise will help. That is really the only thing that will boost the economy. If Obama thinks doing so by raising taxes on the wealthy to give it to the less fortunate is the only politically acceptable way to do that, then fine, do it. America works just fine when the rich are more heavily taxed. The problem then becomes inducing the rich not to flee.

Comments

[MaynardGK]

The re-distribution of tax burden Obama proposes will incrementally improve our economic situation,
and anything beyond this is political suicide. But these measures will be ineffective,
constructed as they are within the narrow box constructed by the masters of the universe rresident
at Wall St. and Broad. We have two elephants in the economy, healthcare and military,
and the consortium of politicians and media pundits that dominate our public discourse have
declared real discussion of these two elements as "fringe".

Like it or not, we are about to embark on a few years of centralized economic planning in the financial sector,
we may as well extend this effort to include the (industrial world's worst) healthcare system. Single payor
would just be so much simpler, but the entire healthcare insurance industry is powerfully, unpatriotically, apoplectically
allied against it. Now that wall Street is crashing maybe we can throw this industry into the fire also?

[oxypolitis]

The Bush tax cuts, you know, those tax cuts for the 'rich' (code word for anyone earning a salary) are not permanent. They will expire in the next presidents term. If they expire taxes will go up for everyone, the tax credit on children will go back down, estate tax maximum will go back up to 60%, marriage penalty will be revived, and capital gains taxes will increase. So if you're married, or have children, or own a house, or have a retirement plan, UNDER AND OBAMA PRESIDENCY YOU ARE SCREWED.

Obama doesn't have to do anything to raise taxes, he doesn't even have to mention it in his plan, all he has to do is vote present. that's because its the Congress that decides what plan gets passed. If his doesn't pass, and they do nothing. Like magic, taxes will increase.

http://www.nysun.com/national/senate-democrats-reject-bush-tax-cut-extension/72898/
Obama voted against extending the current tax rates in all of these areas

http://www.uschamber.com/content/0801_10a.htm
From "Ticking Tax Time Bombs" by Dr. Martin Regalia

You should research and understand the Alternative Minimum Tax (AMT).
http://www.fairmark.com/amt/amt101.htm

[Stephen Herrington - Huffpost Blogger]

The Bush tax cuts will expire if nothing is done. If letting them expire in total were the Obama plan then it would not square with his statements. A plan is just a plan and if you choose to believe he is a liar then just say so, as that is the only thing you have asserted here.

[LibertarianAnCap]

Raising the national debt from 4,411,488,883,139 to 5,807,463,412,200 isn't exactly balancing the budget.

What would universal health care be considered? Most people would consider that to be a new social program or how about the proposed foreign aid to Africa or world hunger?

Both will increase the debt because that is what typical politicians do.

[LightningJoe]

Lest someone think that my previous post is a recipe for failure of the Capitalist system, I'll point out what I shouldn't have to: that there is innovation every day in America, by people willing and able to use the cards that are dealt them.

Punishing corporations that cannot maintain decent standards of accountability is just a very handy way of getting rid of the worst offenders, while making the rest toe the line. America is out of patience with these perps. If they think they can get a better deal operating in China, as a Chinese corporation, then let them, and good riddance. They'll still have to sell products here to make ends meet, but our public will then see them for what they already now are: a foreign corporation.

Once the dead wood is out of the tree, there will be light and air for new healthy growth. Let the pruning begin!

[LightningJoe]

As to "inducing the rich not to flee," I think the answer is easy, if the will exists.

Corporations going oversees are not assisting the American citizenry. I see no reason not to acknowledge that fact with appropriate adjustments in taxation rates; or even in corporate accreditation. Corporate taxes are not the only obligation an American corporation owes the country. They also owe the country allegiance for the business-friendly climate we supply, and for the consumer culture that supplies a market for their products or services.

A company whose main means of production is oversees, who does not repay the consumer with a source of employment that closes the money-loop, is taking unfair advantage of the culture that allowed its creation. I see no reason such a company should not be required to support the culture in some other way, such as significantly increased taxes.

Beyond that, why do we treat them as American corporations at all, if the sum of their activity is to siphon off our wealth for their own pockets, with no return of value for that consideration? That is certainly not patriotic behavior, must less gratitude.

[Brother Stephen]

When they go to ship their goods into our country a heavy excise tax should be required on their goods to reduce the purchase of their products. They are continually draining this country of what wealth still remains. Nearly, everything we buy today (Wal-mart, Costco) comes from China which is a communist country. Until, the money exchanged for trade can be made to be equal, we are in reality supporting and strengthening a communist country. China then takes the debt and buys the rest of this countries facilities. Has there ever been a stupider person than G.W. Bush? I swear, Bush is anti-America!
What more can we allow him to screw us out of? He is for only the rich and ultra-rich.
If people can't see that, they are blind.

[KELLI2L]

How many times in history do we have to make the mistake of believing that Trickle-Down economics works - it doesn't. . . . After what has happened in regards to this BAILOUT - we should pass a law to NEVER again revisit the Trickle-Down economics of Reagan and Bush (calling it "too dangerous to EVER be considered again). . . . . Please - for the sake of America's future - wake up republicans. . . . . And Democrats - please stop trying to give away the BANK to all the poor people in America and around the world (my household budget can't take it !!!) and neither can yours. . . . .

[aletoledo]

I think it's a mistake to believe that Obama closing foreign loopholes with corporate taxes is going to fund every new project, balance the budget and eliminate the debt. A reasonable value to expect to recoup would be a few billion and not the trillions we have in national debt.

It would seem that the author is hoping that Obama's plan is better and really hasn't dug deep into it. He started off with a great analysis of the problem, made some nice points against McCain's plan and for some reason stopped there. He then started chanting "yes we can" to the Obama plan and abandoned all rational thought. Many of Obama's promises are to increase the size of government (e.g. 100k increase to the military) and selectively forgetting about these points is disingenuous.

The fact is that truly neutral evaluations of their tax policies (i.e. Tax Policy Center) reveal that both candidates will be relying upon deficit spending. We have nothing to hope for and all we can do is hope we keep our heads above water until 2012.

[Stephen Herrington - Huffpost Blogger]

Thanks for your comment aletoledo, but you might have missed this paragraph, "Both McCain and Obama will have to raise taxes to pay for programs for which the public is clamoring, whether those programs are universal health insurance, expanding the military, trying to retire the national debt, or simply trying to balance the budget."

[MrCommonSense]

I have to agree with Sharonrj50 but sad to say the vast majority of commentors here have never taken the time to investigate Obama's factual record or they just don't really care. Being a true Independent, I do my best to understand everything I can about both candidates not only in this race but always in my own state political races. Obama is a very intelligent man who is an excellent politician and being an "excellent politician" may very well be just what we do not need! His spin claim of reducing taxes for 90% of Americans is just not true considering that millions of low income to middle income regular folks pay little if any taxes at all. I am a small business owner and pay very little taxes but what I do pay is a struggle at times. Over the past 6 months of learning all I can about both Obama and McCain, I must admit I just don't think Obama is the right choice. But if he wins, I hope I am wrong.

[phoenics]

The Ross Perot chart you are referring to in saying that most of low income to middle income regular folks pay little if any taxes at all includes part-timers in its information. Part-timers don't make a whole lot of money, thus they are taxed less. You know - those teenagers working part-time?

And sorry - but his claim was that 90% of working Americans would not be taxed more is true. The math is pretty clear. It's also about your taxable income - not your gross income.

I think focusing on the tax issue is besides the point anyway. Under McCain's plan, the economy would not grow - thus his tax argument is moot. I would rather make MORE and pay more than to make less and have any tax savings I get eaten up by inflation - which is what is happening now.

[messy]

Change that as far as the current crisis goes: Obama will break your toe. McCain will break your neck.
What would you rather have done?

[billw8017]

Let the rich flee. If they take their businesses with them, that converts those to foreign industries. There have always been foreign industries, and America simply has to recover its ability to compete.

Stephen Herrington is right that "...taxes are economically neutral if they meet current expenses and economically damaging if they do not." Surpluses do tend to remove money from the economy and cause deflation. Deficits undermine the value of the dollar and trend toward inflation. We see, now, how this works out: The new money inclines toward the politically connected who use exotic instruments of investment and bubbles, but as these are mere salesmanship, they cannot support themselves.

[Stephen Herrington - Huffpost Blogger]

Now that, sir, is the courage constructed of understanding.

[LibertarianAnCap]

How does increasing taxes increase prosperity? This comment is absolutely nonsense.

How does transferring wealth from productive people and giving it to government parasites going to increase prosperity?

Eliminate the Federal Reserve (real culprit behind the entire mess), lower taxes and cut government spending is the only way to increase private prosperity. Government is out of control and raising taxes while simultaneously raising spending (or maintaining current levels) will do nothing to lower the national debt/increase prosperity. Government leaders created this mess and taxpayers should not have to bail out anyone for any reason.

[fuzzywuzzy6]

Traditionally, it is the working poor pay sales and the middle class that have supported this country. Right wing thinkers who talk about fair taxes want to impose a flat tax or sales tax in place of the federal income tax. These are both regressive and unfair to anyone who does not have a healthy income. When you think about it, who benefits most from govt services at all levels of govt.? It is not the poor, who have to wait years for sewer, street and sidewalk repairs and do not get good emergency response, even when they live in reasonably safe neighborhoods. It is not the middle class, who often have to wait for long periods for city and county repairs. And who has the access to the local and state govts? It is not the average citizen. In California, the state has been taking money from counties for years because of the property tax revolt. this has resulted in a very poor education system, particularly when California was often the wealthiest state in the union. The local govts always target the weakest: the sick, the poor, the children, and those with the least political clout.

Not to mention all the subsidies for large corporations. Small Business Administration loans for smaller units of conglomerates. Farm subsidies going primarily to corporate-owned and the largest, wealthiest family-owned farms. Nuff said.

[Stephen Herrington - Huffpost Blogger]

I'm very glad you brought this up fuzzywuzzy6. The progressive tax is an historic norm in economics. I had thought to discuss it but at the cost of length decided not to. Adam Smith, progenitor of the "invisible hand" itself in 1776, was in favor of a progressive tax system for reasons similar to your observations. He, among others, felt that the chief beneficiaries of a lawful and constructive government were the wealthy whose very ability to generate and retain wealth depended on the prudent application of government.

Not only do things like schools, infrastructure, national defense and financial regulation benefit the wealthy, but also serving the wealthy is the rule of law and the infrastructure of law in the cannons of property rights, contracts and, my favorite, habeas corpus. The alternative to government is a private army enforcing the rule of an autocrat. I believe the world has already been there.

A sound government is the only framework in which wealth can be built without force of arms. It makes sense to support it in as much as it is both the stager and guarantor of your wealth.

[Kyler]

Our so called free market system has not been free for a long time. Unless you call a private company with no oversight or transparancy being in control of our money and interest rates.



Even if the Fed is the wonderful "quasi governmental think tank working for the American people" the we are led to beleive, there is no reason that the books are not examined, and its ownership not exposed.



I worked in the Aviation industry for ten years, and I have first hand knowledge that the Fed operates a fleet of 67 private jets!!!!!!! The imaginary money business must be good! Think about that the next time you pay your federal income tax.

[charon]

Tax cuts to stimulate the economy was proven bankrupt by Hoover. FDR restructured and raised taxes and started America on the road to recovery. True, he didn't restore the country to the heady days of the roaring 20s, but he did restore confidence in financial institutions and put many people back to work building the infrastructure that helped win WWII. Tax increases, as long as they are appropriately structured and benefit those who spend them on necessities, as opposed to investing them or buying luxuries like diamonds and gold, are the best way to stimulate the economy for the mass of working people. We can't afford another 4 years of failed New RIght policies and lies.

[billw8017]

It is possible to exaggerate the splendor of the 1920s. Florida went into an economic collapse after a real estate bubble there at the beginning of the decade. The South was generally poverty stricken. Agriculture was depressed and a labor survey in Baltimore indicated the 40% of the heads of households were unemployed.

In Bad Money, Kevin Phillips writes that inflation is understated by about 2%. Re evaluating the GDP accordingly indicates our recent "recovery without jobs" was no manner of recovery at all. The Bush years do correspond to the 1920s, and our economic crash is more significant that you may have thought.

[darker]

HOW can the lower tax rate "produce prosperity" when Republicans have a USTreasury GIVE-AWAY to a bunch of DEREGULATED, CORRUPT WAR PROFITEER CORPORATIONS and other corporate-welfare-queens? How? No way does that equal prosperity.

The BARELY-TAXED RICH get richer in the outlandish Republican Economy that
now crashes daily like a drunken sailor. We sure don't want sailor McCain in charge
of our economy!

Enough already. No more years for Republican corruption, lies and destruction.
Vote to save America from Republicans: WE CANNOT AFFORD THEM ANY MORE!

[RButler]

When Bush took office, there supposedly was a surplus. When he cut the first round of tax rebate check in 2001 or 2002, my first thought was 'the energy companies will swoop in and capture that excess money in the economy' like skimming the cream off the top. Sure enough. You thought you could go out and buy a plasma TV with the money but didn't you realize you were spending more on energy: gas, electricity etc. Remember Enron? I live in CA we're still paying for it.

So, as wonderful as tax cuts sound, I'm skeptical that they will improve the lives of middle and lower class taxpayers as prices on some things will rise to absorb the money. Likewise, if there were to be universal health care that wasn't provided by the employers, do you think the employers will automatically pay higher wages with the savings or keep the profits?

[charon]

Without the Republican-backed Enron ripoff of California, Arnold would never have been elected governor. They seriously damaged our economy and society. Nothing but a pack of sociopathic traitors.

[kells1001]

Stephen:

You have it so right. From listening to talk radio Republicans or John McCain during the debate they have been hypnotized by the Reaganomics Effect. McCain commented during the debate that Herbert Hoover was the last President to Raise Taxes during the Depression. Certainly as you've shown FDR attempted to redistribute opportunity and income with higher tax rates. Americans should remember Parker Brothers bought Monopoly in 1935 and the game itself explains the results of unrestricted capitalism. For some reason the taboo of discussing economics realistically has reduced it to Greed politics pushed through Globalization and many less educated media moguls throughout the world.

Certainly the world is getting a new lesson in Economics the hard way.

[Sayso]

As a Democrat I think Sen. John McCain is John McCain. He is not President Bush. He may not be a Democrat, but unlike the nominee of my party, he is trustworthy, he is known, and he shoots straight.

[LITU]

Let me offer this for your reflection. It is only one of many testimonials available through the various search engines.

http://www.rollingstone.com/news/coverstory/make_believe_maverick_the_real_john_mccain/page/6

John McCain is ANYTHING but a straight shooter.

I'm a Vietnam vet, and I approve this message.

[texfly]

What has Obama done to lose your trust? What has McCain done to gain it? I knew litlle about McCain until this campaign even though I watched many interviews on Meet the Press. You can call him a maverick but he has demonstrated very little leadership in getting the both sides of the I'll to cooperate. In 25 years he has become an icon of the odd-man-out in the Senate, not the great compromiser.. He has been someone to be respected, but also somone who can largely be ignored.

In McCain I see a panderer of the worst kind. So erratic on the "bailout" issue I really couldn't tell what he was saying or doing. The choice of Palin for his VP was mind boggling. Yes, it demonstatres what a maverick he is, and also exhibits a profound lack of judgement. We need somone without a shoot-first-ask-questions-later mentality. We need someone who will listen, evaluate, then decide. Obama fits the bill.