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Tax Policy – Clinton verses Obama – 1993 verses 2009 October 12, 2008

Posted by John in Technology.
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By Anton Wahlman

At the center of Senator Obama’s tax policy argument is that by raising taxes on the top 5% of income earners, we are only returning to President Clinton’s 1993 tax increases. Let’s for a moment leave aside that Obama really is looking to raise taxes on social security (above incomes of $103,000) and on everyone’s capital gains, regardless of income. Rather, the Obama argument goes that because we had a relative economic boom following the 1993 tax increase, it’s perfectly safe to raise taxes in 2009 as well.

Wrong. There is a major difference between 1993 and 2009 that Obama and McCain alike are both failing to articulate. In 1993, the U.S. was one of the world’s lowest-tax countries, with Europe mostly at much higher rates, and most of the Asian economies too underdeveloped to be alternatives for investments and businesses. Eastern Europe was under a cloud of uncertainty and instability following the rapid demise of The Soviet Union on Christmas Day 1991. The 1993 tax increase left the U.S. as the leading free-market economy, albeit at a smaller margin than before.

As we enter 2009, the U.S. position in the world is extremely different than it was 16 years earlier. We are no longer the low-tax beacon of the major industrialized world. Numerous countries in Western Europe, Eastern Europe, Asia and elsewhere now have lower capital gains taxes than the U.S. The same goes for top marginal income tax rates, where Albania is at 10%, Estonia 13% and Russia 17%, just to mention a few. Here in the U.S., the current top rate is 36% for Federal, and if you live in NYC or California, you probably pay very close to 50% all-in. Our 15% long-term capital gains tax can’t compete with the 0% rates in many other countries, but don’t forget that many capital gains taxes aren’t long-term, at which point you will pay 36% or higher.

The effect of the current high-tax policies is becoming an increasing disaster. There has been no employment growth in places such as Silicon Valley in the last decade, because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. Have you noticed the lack of IPOs in the U.S. this year? For the first time in 30 years, there were no venture-backed IPOs. This has a significant impact to the standard of living here at home.

In this context, it is strange to listen to Senator McCain saying repeatedly that he wants to “Keep taxes low.” Well, if taxes aren’t low, why does he want to keep them? We have some of the world’s highest capital gains and income taxes, so we are hemorrhaging investments and human capital to those places where they are not taxed as much.

So what is the 2009 recipe to strengthen the U.S. economy? Clearly McCain is wrong about “keeping taxes low” because they are already way too high. As for Obama, he proposes an outright train wreck in terms of forcing investors, businesses and high-wage earners abroad. Rather, we should once and for all abolish the capital gains tax – whether for short-term gains, or long-term. We should also become competitive with the fastest-growing economies in the world by cutting the top Federal rate to below Albania’s 10% rate. Given that some U.S. states and local governments have combined rates of around 10%, it would be appropriate to abolish our Federal income tax altogether. This would stop the hemorrhaging of investments, businesses and talented individuals leaving our country.

What about the budget deficit, you say? Wouldn’t abolishing the income tax and capital gains taxes reduce tax revenue? Of course it would. So the answer is to cut government spending correspondingly. The Federal budget now exceeds $3 trillion, or $10,000 per U.S. citizen, of which the Department of Defense is little over 20%. Big ticket items are Medicare, Medicaid and Social Security, for starters. Medicare and Medicaid in particular, are hugely inefficient and unnecessarily bureaucratic ways to induce people to over-consume health care services, and should be abolished in favor of lower taxes that would lead to a booming economy. The list goes on, but the Federal budget can be cut from over $3 billion to around $2 billion immediately, followed by another cut down to $1 trillion over time as Social Security payments dwindle in favor of a private 401(k)-style private system. The government can also raise funds by selling property, including land. After all, various agencies of the U.S. government is by far the largest property owner in the country, and could fill several years worth of budget gaps by auctioning off vast amounts of lands and buildings no longer necessary when we cut off the bureaucracy and the socialist apparatus currently consuming our tax dollars.

Comments»

1. Drew Robertson - October 12, 2008

Grover Norquist has done more to screw up this country than anyone else except…..Cheney, Bush, Paulson, Rove, Gramm, etc. Is that the crowd you want to run with? Pathetic. It’s one thing to be wrong. It’s inexcusable to be stupid. Your ideas have no chance of getting traction in this increasingly socialist society. We’re all Keynesians now.

2. jonathan - October 13, 2008

no goverment is efficient, and as such, they need to be overlooked in order to reduce their spending as much as possible. income taz is the worst invention by the goverment, ever since they don’t doo anything good with that money anyway. by allowing people to keep their money, and spend it where they most need it, it would at least make sure that resources are allocated efficiently. i liked this article.

(btw: you seem to have mixed up the billions and trillions in the last parragraph)

3. DC Policy - October 13, 2008

Here in the beltway we are very weary of any more republican bull. Obama is the man on Internet. Look at the policy innovations around the Internet and it all came from the democrats

4. Karen - October 16, 2008

I am not leary of Republicans, this is class warfare, the guy who wrote the article is right. The dems passed NAFTA and this killed alot of our industrial nation. In our region we have suffered severe layoffs in industry and heathcare. No one person is going to fix the economy. My feeling is we just bailed out the rich, now we have to bail out the poor, the middle class will cease to exist. By the way I am proud of my American heritage. I for one am willing to save it. The socialist plan of the democrats does not work for me. The only thing congress wants to do is spend we are indebting our grandchildren’s grandchildren. This money comes from China, the national deficit is outrageous. I am all about fiscal responsibility. Do not be deceived by the dems they have another agenda in mind and its not about our poor people. They will send it to the UN like the oil for food program. I ask that all the people vote and pray for our nation.

5. charles - October 23, 2008

Obama’s tax plan will destroy the Social Security system.

Obama says his income tax plan will lower taxes for 95% of Americans. There is just one problem with this, 40% of Americans already pay no income tax. Obama’s response to this is that these people pay Social Security tax. Well, that’s not income tax, but a contribution to their retirement plan. So if he wins and implements his tax plan, for the first time in the history of Social Security, 40% of the people who will get retirement benefits will have paid nothing for them. Social Security will then loose all pretext of being a retirement plan, and will become a national welfare program.

This will cause Social Security to lose public support in a massive way. Leave Social Security contributions out of income tax plans. If you take some peoples income taxes to pay others Social Security taxes, Social Security will be destroyed forever.

http://strategicthought-charles77.blogspot.com/2008/10/obamas-tax-plan-will-destroy-social.html

6. YoungEconomist - April 10, 2009

@Karen: Free trade causes growth for both countries. I don’t care if it was by Democrats or Republicans.

As a result of NAFTA, employment shot up by 21 million workers, corresponding to an unemployment rate change from 6.9% to 5.1%.

Free trade creates jobs. For example, when we allow countries to export their goods to our stores, we pay less. This means people have more money to spend that they wouldn’t have otherwise had. This boosts jobs throughout the economy, either through savings (aka investment, creating more jobs) or from more consumer spending. Not only that, but because other countries are making money, they can buy our goods and other countries’ goods, which increases the business in our export industries, along with other countries’ causing a net increase in wealth and standard of living.
Correspondingly, the idea that tariffs increase employment is bull. When people are forced to pay more for one good, they spend less on others. This decreases national employment. To add insult to injury, when we buy less of, say, the UK’s goods, they have less US $’s to spend on our exports, so the rest of the US economy suffers. This causes a decrease in the standard of living of both countries.

It’s ridiculous to think that keeping employment in industries we do less efficiently is a good idea, by any stretch of the imagination.

7. ThisDudeIsHere - April 25, 2009

Speaking of taxes, here’s how to reform our tax system: abolish all taxes, all sources of government revenue, period. Start from ground zero with a nation sales tax of 1% (obviously there would be state sales taxes too, but hopefully, they’d get lowered to no more than 1% as they see the success with our lower tax systems).
This would give us a total taxation of 1%-2% of GDP. Or no less than $132 billion to $264 billion a year.

This would simplify the tax system, freeing up labor resources, time, entrepreneurial ability, capital goods, and capital. It would allow even poor people to pay less in taxes (much less if we eliminate the Inflation Tax AND the Federal Reserve, as would happen in this plan).

Federal debt you say?
No problem. Slash spending by getting rid of all of it save only for what’s outlined in the US Constitution. We can also sell roads to private owners (again, starting from ground zero with the national sales tax, supplemented with this would provide more gov’t revenue there to pay off debt) allowing the roads to be cheaper, better maintained, etc.
Same goes for the HUGE amounts of public owned land, thereby paying off debt, and putting the land into more capable hands. As would putting money back into the pockets of the people the government borrowed the money to fund this deficit spending in the first place. That money can now go into the economy and be invested into capital projects increasing the standard of living and number of jobs for all.
As for defense spending, this really needs to be cut. Get rid of all defense spending save for R&D, along with the bear bones needed.
Get rid of our hundreds of bases in countries and go back to a Non Interventionist policy, thus, saving large amounts of money.
From what I understand, we could fund just the Constitutional functions of our government with the current revenue from Tariffs and Excise taxes and STILL have a surplus.

This would greatly increase economic growth, so the amount the government makes would be increasing too, while people are able to keep as much of THEIR money as possible.

Finally, put an Consitutional Amendment in place to prevent the gov’t from overspending and/or overtaxing.

Cheers! X3

8. Deane - November 15, 2010

You are out of your mind as far as thinking you can cut a couple of trillion by cuts in social security and medicare. Did you see the reaction from AARP and the Democrats when OBama’s deficit panel recommended raising the retirement age to 68 in 2050 and 69 in 2010? Just that proposed change caused a revolution. Plus all the social security recipients “paid in” I know it’s a Ponzi, however they did pay in and the government spent the 2.5 trillion surplus on militasry, tax cuts and other government programs. It’s gone, there is no social security trust fund. You just can’t confiscate the money from the people who paid into the “system” Even though we stole it from them, we have to honor our obligation to them. Plus 65% of the recipients live almost exclusively on Social Security and would starve if you cut it. Ditto for medicare.


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