Commentary

Barack Obama and the Taxpayer

In their 1992 presidential campaign book, Putting People First, Bill Clinton and Al Gore said, “We will lower the tax burden on middle-class Americans by asking the very wealthy to pay their fair share. Middle-class taxpayers will have a choice between a children’s tax credit or a significant reduction in their income tax rate.”

By Jan. 15, 1993, however, the newly elected President Bill Clinton told The New York Times that because of worsening deficit projections he was forced to renege on his campaign promises for a middle-class tax cut:

“Mr. Clinton spoke throughout the campaign of the need to redress declining middle-class incomes during the 1980s. He proposed a tax cut for the middle class nearly a year ago, in New Hampshire, and repeated the pledge frequently. But in the weeks since his election … the new team of Clinton economic advisers has apparently made new calculations and concluded that the tax cut idea is not tenable if Mr. Clinton wants to reduce the deficit and also move ahead with an ‘investment’ program to revive the economy. Growing deficit estimates require a president to shift gears, he said, adding: ‘I think that it would be irresponsible for any president of the United States ever not to respond to changing circumstances.’”

Cynics have suggested that once President-elect Barack Obama confronts a frightening 2009 deficit of at least $1 trillion, he, too, will renege on his “middle-class tax cuts.” When asked about the Clinton precedent, though, Obama said he would have made different choices. He implied that redistribution through the tax code is his first priority.

Shortly before the election I wrote, “The most troublesome tax increases in Barack Obama’s plan are not those we can already see but those sure to be announced later, after the election is over and budget realities rear their ugly head.”

A 20% tax rate on the dividends and capital gains of high-bracket taxpayers would raise little or no revenue, but it is nothing to get terribly agitated about. Raising top tax rate to 39.6% would discourage some effort and investment, but many professionals and small businesses could avoid that by sheltering more income under the lower corporate tax. Obama’s plan to phase out deductions and personal exemptions for those same taxpayers would be brutally unfair to large families and those living in high-tax “blue” states, so it might even prove to be foolish politics.

Those who imagine the government won’t try to raise taxes during a recession have short memories.”

Those who imagine the government won’t try to raise taxes during a recession have short memories. The Omnibus Budget Reconciliation Act was signed by George Bush Sr. on Nov. 5, 1990—months after the economy slipped into recession that July.

Looking beyond next year, the biggest fiscal danger is not the tax increases Obama describes as such, but the tax increases he describes as “tax cuts”—namely, $1.3 trillion of unfunded entitlements to “refund” checks amounting to $500 to $4,000 apiece.

Under one Obama plan, if you save $1,000 and take care not to earn too much, the government will send you $500. A student with family income below $100,000 (one spouse should stay home) could get $4,000 for 100 hours of community service, which is $40 an hour tax-free.

There is a $3,000 child care credit which is taken away as income rises from $30,000 to $58,000. There is another $500 refundable tax credit per job to make Social Security benefits appear free, but it phases-out quickly above $75,000 (a figure Obama described as $200,000). It is quite possible to collect several such checks, but earning more income can then result in losing more than 50 cents on every extra dollar earned as the credits clawed back.

An Oct. 23 Wall Street Journal editorial, “An Obamanomics Preview,” concluded that “If Mr. Obama really wants a ‘stimulus,’ he’ll announce that given the condition of the economy he won’t raise taxes at all.” Convenient as they may seem, such countercyclical (Keynesian) arguments quickly turn against you whenever the economy is not in recession—which is most of the time.

When the economy recovers next year (as it always does if politicians restrain their meddling), Democrats will doubtless give credit for the recovery to the new president. But they might also try to convert the Republican “don’t raise taxes in recession” mantra into an invitation to raise tax rates after the recession has passed.

A potentially bigger problem is that Obama may well use the countercyclical argument to his advantage by putting off the issue until 2010, when the Bush tax cuts simply expire.

If tax increases are not enacted in 2009, why bother to raise only a few tax rates during 2010 when doing nothing at all would automatically result in total repeal of all the 2001-2003 tax cuts?

Armed with that lucrative blank slate as the looming new baseline, a Democratic president and Congress could magnanimously agree to preserve only the fiscally wasteful “feel good” aspects of the original Bush bill—the hugely expensive 10% tax rate and child credit, for example—while letting more than just the top two tax rates go back up, and lifting the estate tax rate, too. All in the name of fiscal responsibility, of course.

Higher tax rates always fail to raise the revenue their proponents are counting on. When that happens, we know where Democrats will look to raise more. And that is to reach even deeper into the pockets of any remaining profitable businesses or (even rarer) successful investors.

For those looking beyond one year, the biggest risk to both individual and corporate taxpayers is not that the new president will make good on his promises to raise a few tax rates and close a few loopholes. The biggest risk is that he will make good on his grander promises to enact all those tax-based entitlement programs disguised as “tax credits.”

If millions more voters become accustomed to paying nothing for government (not even for their own Social Security benefits), and instead to receiving a bundle of Treasury checks, it will become almost as difficult for any future president to end those programs as it will be for taxpayers to pay for them.

Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth.