A major theme of Obama’s reelection campaign is centered on taxes. On the one hand, he decries the unfair “Bush tax cuts for the wealthy”, while on the other, he creates new tax credits to purportedly help the recovery. Both are emotional appeals aimed to garner votes. Such policies reveal — once again — how economically ignorant our President is.
The rates currently in effect have been in force for more than 8 years, and what is now being urged by Obama is an increase in the highest marginal rates to what they were before the “Bush tax cuts of 2003”. Obama does not know his economic history. In what way was the 2003 change even a tax cut? It really wasn’t. At most, it was a very slight reversal of the major tax increases that had been put forth in the preceding fifteen years.
To put it into perspective, the last major change to the Internal Revenue Code (IRC) was a revenue neutral change in 1986, whereby the entire Internal Revenue Code was revamped. That brought down the tax rate, eliminated deductions and reduced tax shelter type benefits. This served as a flat tax adjustment which indisputably was responsible for the strong economic growth that followed, because, at that rate, it wasn’t worth the time, energy, and expense to shelter money elsewhere. But after we made this major positive correction, our legislators went right back to business as usual with new tax laws and changes.
The new 1986 IRC set the maximum tax rate at 28%. Through the government’s inability to keep promises (which was to reduce rates in lieu of changes to deductions), both the Democrats and Republicans participated in breaking promises in the ensuing years.
We saw the rate increase from 28% to 31%, as the first President Bush broke his“read my lips” promise. Through the Clinton administration, the maximum rate went from 31% to 35% and then to 39.6%. All in all, the maximum tax rate increased 40%. Bush’s tax cuts then, were not tax cuts at all – they were simply a reduction of the 40% tax hikes, down to a more modest 25% increase in the rates, from the base set made in 1986. The margin cuts of 2003 simply eliminated the last of three successive rate increases, each of which had broken the implicit pledges made in the overhaul.
Now in recent months, there has been a renewed call to clean up the tax code that has gotten out of hand in a mere twenty-five year span. What needs to happen is similar to what happened in 1986 — lower the rates, but get rid of deductions for special interests (such as special allowances for the oil and gas industry, “green” initiatives, and other crony tax benefits). In sum, make the code shorter, simpler, and more beneficial for economic growth.
The reality is that Obama will try to get reelected by saying that the economy is still weak, so he must do something about jobs. He has proposed a plethora of new credits to purportedly help the situation, such as employment credits, business credits, etc, but they’ll only worsen the byzantine code.
Even Obama’s commissions have argued in favor of cleaning up the tax code. Why make it more convoluted with more credits? Quite simply, they sound good to the average taxpayer, who will reward his “sensibilities” with their vote. What he doesn’t tell you is that such tax credits are merely government spending run through the tax code. More spending and deficit is only going to continue to hurt our anemic recovery. Unfortunately, such a fraudulent plan only puts his own ambitions ahead of the best interests of his country.