So what explains the crazy, cockeyed optimism of House Democrats? Maybe they still believe Team Obama’s rosy-scenario forecast that shows the stimulus package a) keeping unemployment under 8 percent this year and b) launching an economic boom next year and beyond. For some reason, though, they think the battered U.S. economy is so strong that politicians can pile tax upon tax on it with no fear of further harm. Less than three weeks after passing a costly cap-and-trade carbon emission plan, Pelosi & Co. have giddily unveiled a $1.2 trillion healthcare plan partially funded by a $544 billion surtax on the work and investment income of wealthier Americans, including small business owners.
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The ten-year proposal calls for a 1 percent surtax on adjusted gross income — including capital gains — between $350,000 and $500,000; a 1.5% surtax on income between $500,000 and $1 million; and a 5.4% surtax on income exceeding $1 million. (Interestingly, the House fact sheet on the surtax forgets to mention the highest tax rate. Hey, they were in a rush.) How bad an idea is this? Let me count the ways:
It’s not the first Obama tax hike. This tax would be in addition to the $1 trillion in new taxes that Obama called for in his budget released earlier this year. (And then there’s cap and trade, remember.) And if healthcare reform costs more than expected — what are the odds of that, you think? — the surtax would go up.
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It pushes income tax rates above a key threshhold. Once you take into account state income taxes, the top tax rate would sneak above 50 percent. Research by former White House economist Lawrence Lindsey has found that rates above 40 percent really start to hit economic growth especially hard.
It’s risky in a weak economy. Democrats love the “consensus view” when it comes to climate change, so how about the economy? The consensus view is for unemployment to hit double digits this year and stay high throughout 2010 and beyond as the economy staggers to its feet. Even Treasury Secretary Tim Geithner said “it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.” In a “long recession” environment, do we really want a policy that, according to research that current White House economic adviser Christina Romer conducted at Stanford University, is “highly contractionary.”
It actually makes America’s healthcare problem worse. Entitlements, including Medicare, will eventually bankrupt the economy unless action is taken. Agreed. But lowering the potential U.S. growth rate will only make those problems worse by generating lower tax revenue and making the overall pie smaller than it would be otherwise. Yet many economists think government interventions in finance, housing, autos, energy and now healthcare will do just that. And adding layers of additional new taxes helps how?
It makes the tax code more lopsided and inefficient. As it is, the top 1 percent of Americans in terms of income pay 40 percent of taxes. Not only would this plan exacerbate this imbalance, it adds further complexity to the tax code. Most tax reformers favor a simpler system with fewer brackets and deductions matched by a lower rate. Indeed, Howard Gleckman of the Tax Policy Center points out the following:
Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.
It hurts U.S. competitiveness. America already has the second highest corporate tax rate in the world. Under the House plan, the top U.S. income tax rate would be higher than the OECD (advanced economies) average of 42 percent. France and Germany, by contrast, are looking to keep rates stable or lower them. Pro-growth China doesn’t even tax investment income.
It ignores the lessons of Clinton. Democrats love to point out how the Clinton tax increases didn’t tank the economy back in the 1990s. Oh, you mean the economy that was expanding for more than two years before he signed his tax increases? The economy is far weaker today and may be anemic for some time given the history of economies that suffered a banking crisis.
It ignores the lessons of 1937. The slowly recovering 1930s economy weakened again in 1937 and 1938. Again, Christina Romer tells all:
In this fragile environment, fiscal policy turned sharply contractionary. The one-time veterans’ bonus ended, and Social Security taxes were collected for the first time in 1937. … GDP rose by only 5% in 1937 and then fell by 3% in 1938, and unemployment rose dramatically, reaching 19% in 1938. The 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But, we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline.
Except in this the case, Uncle Sam is not taking away a lifeline but tightening the noose.
It pays for a wrong-headed healthcare reform plan. Health exchanges, a public option, subsidies, taxes … well, we could go on and on. Or we could try to create a simpler consumer-driven market. Harvard Business economist Regina Herzlinger recommends reforming the tax system by making the money spent by employers on health insurance available as cash, tax-free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” she wrote in an analysis for consultancy McKinsey. Not even on the Obamacrat radar screen, though.
All in all, it’s another sign from the Obama administration and the Obamacrats in Congress that their top priority is redistributing existing wealth — at least what’s left of it — rather than creating new wealth. That, I guess, explains those ear-to-ear smiles on Capitol Hill.