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Morning Bell: How Not to Grow the Economy

Posted By Conn Carroll On April 17, 2008 @ 9:03 am In Ongoing Priorities | Comments Disabled

If last night’s Democratic debate [1] proved anything, it’s that the era of liberal tax-and-spend promises is back with a vengeance. The most illuminating exchange was between ABC’s Charlie Gibson and Sen. Barack Obama on capital gains taxes. After Gibson laid out the facts — that each time rates have been cut in the past 20 years, revenues from the tax have gone up, while the one time the rate was raised, revenues went down — he confronted Obama with his promise to raise the capital gains rate to levels as high as 28%. Obama did not back down from his promise. Instead, he mentioned “that the top 50 hedge fund managers made $29 billion last year” and that he wants to make sure “that our tax system is fair.”

So to recap, Obama doesn’t care if lowering the capital gains tax rate brings in more revenue; he still wants to raise the rate to stick it to the top 50 richest hedge fund managers in the nation. Meanwhile, the more than 100 million Americans who own stock, including middle class families and poor retirees, would be directly hurt by Obama’s tax increase. As Jack Kemp reminds Obama today [2]: “You can’t get rich on wages, you have to earn, save, invest, reinvest and pass on to your children the products of your labors. Senator, I believe our tax code punishes this process of upward mobility, especially for people of color, and in some cases it actually prevents people from escaping poverty.”

Besides the millions of poor and middle class Americans directly affected by Obama’s capital gains tax hike, every American will be indirectly affected by the decreased investment from the capital gains tax hike. The Congressional Budget Office notes: “Reductions in capital taxation increase the return on investment and therefore the formation of capital. The resulting increase in the capital stock yields greater output and higher incomes throughout much of the economy.” Heritage research shows [3] that just allowing the 2003 tax cuts to expire (thereby increasing capital gains rates to just 20% instead of the 28% that Obama wants) would cause employment to shrink by 270,000 by 2011, GDP to fall by $44 billion by 2011, and personal income after taxes to decline by $113 billion by 2011.

And that is just the taxing side of Obama’s economic plan. He has also promised to spend $60 billion on infrastructure [4] that he claims will create 2 million new jobs. Again, however, history shows his plans just will not work. A 1986 Government Accountability Office (GAO) study [5] of the 1983 Emergency Jobs Appropriations Act found that less than 1% of the jobs created by the economy during the relevant period could be attributed to the program, and that each job cost the taxpayer $546,136 in 2007 dollars. One Department of Transportation computer model purports to show that $1 billion in highway spending will produce the equivalent of 47,576 jobs for one year but other reviews of that study demonstrate that those job gains are offset by losses elsewhere in the economy due to decreased private consumption and investment [6].

Quick Hits:

  • Comparing Vermont’s conservative mortgage lending practices and corresponding low mortgage delinquency rate to Nevada’s liberal lending practices and high delinquency rate, the USA Today [7] asks: “Should taxpayers in Vermont be asked to bail out home buyers in Nevada?”
  • According to a new Standard & Poor’s study [8], the taxpayer risk from Fannie Mae and Freddie Mac yields a potential fiscal cost to the government of up to 10% of GDP, which could even jeopardize the AAA credit rating of the U.S. government.
  • While hundreds of small businesses in California say they can’t afford to offer paid sick days to employees, Democratic Assemblywoman Fiona Ma says they are wrong and is working to pass a bill to force them to do so. [9]
  • Air quality regulators in the San Francisco Bay Area are set to impose $1.1 million in annual carbon fees on all businesses from refineries down to bakeries. [10]
  • House Democrats are planning to combine all Iraq and Afghanistan troop funding requests into one appropriations bill that might be the only appropriations bill they pass this year [11].

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/04/17/morning-bell-how-not-grow-the-economy/

URLs in this post:

[1] Democratic debate: http://abcnews.go.com/print?id=4670271

[2] reminds Obama today: http://online.wsj.com/article/SB120839404671921509.html?mod=opinion_main_commentaries

[3] research shows: http://www.heritage.org/Research/Taxes/wm1891.cfm

[4] promised to spend $60 billion on infrastructure: http://blogs.usatoday.com/onpolitics/2008/02/obama-to-call-f.html

[5] study: http://archive.gao.gov/f0102/132063.pdf

[6] other reviews of that study demonstrate that those job gains are offset by losses elsewhere in the economy due to decreased private consumption and investment: http://www.heritage.org/Research/Budget/bg2121.cfm

[7] USA Today: http://www.usatoday.com/money/economy/housing/2008-04-16-housing-bailout-help_N.htm

[8] study: http://online.wsj.com/article/SB120839058302821333.html?mod=opinion_main_review_and_outlooks

[9] force them to do so.: http://www.sacbee.com/103/story/868410.html

[10] $1.1 million in annual carbon fees on all businesses from refineries down to bakeries.: http://www.nytimes.com/2008/04/17/us/17fee.html?ref=todayspaper

[11] the only appropriations bill they pass this year: http://www.cq.com/document/display.do?docid=2705455&sourcetype=6

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