The Heritage Foundation - Leadership for America

Benjamin Franklin wrote in 1789, “In this world nothing can be said to be certain, except death and taxes.” But although the outcome is always the same when the grim reaper visits, the punishment the tax man inflicts can vary widely. Since the early 1980s — after Americans rejected Jimmy Carter and embraced Ronald Reagan and his tax cuts — the United States has benefited from relatively competitive tax rates. But if Sen. Barack Obama’s tax plan becomes law, the IRS will become one of the most punitive tax men in the world.

Obama’s Plan

Obama’s tax plan has two major components. First, he promises to end the Bush tax cuts, allowing the top two tax rates to return to 36 percent and 39.6 percent. Second, he promises to end the Social Security payroll tax cap for incomes above $250,000. Individuals making more than $250,000, therefore, would face a 15.65 percent tax rate from payroll taxes in addition to a top income tax rate of 39.6 percent for a combined tax rate topping 56 percent. Individuals living in cities or states with high taxes such as New York City or California would have tax rates approaching 70 percent, levels not seen since Carter was president.

Tax Avoidance

Back when the top marginal tax rate was near 70 percent under Carter, tax shelters and tax avoidance were common among top income earners. These gimmicks reduce investment and economic growth. Some individuals will attempt to transfer their compensation from wages to capital gains since capital gains would be taxed at 25 percent. Others might waste try to incorporate so they could pay business taxes instead of income taxes. All of these schemes divert resources from wealth creation to lawyers and accountants who implement the schemes.

Income Flight

High tax rates also encourage the flight of capital and income to lower-taxed overseas destinations. Visiting Britain recently, French President Nicols Sarkozy remarked that France’s high taxes had driven so many French to London that it had become the seventh-largest French city. Obama-sized tax rates would drive many creative Americans to Canada and London as well.

Unemployment

Currently only six of the top 30 industrial nations have combined local and national tax rates above 55 percent. The average unemployment rate rate for those countries is 7.35 percent. Under Obama’s plan, the top marginal tax rate would exceed 60 percent, which means only Hungary would have a more punitive tax rate. Hungary’s 2006 unemployment rate was 7.5 percent.

Quick Hits:

• A Georgia state court became the first in the nation to cite the Supreme Court’s Massachusetts v. EPA decision while rejecting a permit for a coal power plant citing global warming.
• India acknowledged global warming was a problem, but refused to adopt caps on carbon emissions and reinforced its long-stated belief that developed nations such as the U.S. should bear the costs of reducing carbon worldwide.
• Experts warn that biofuel mandates, planned to rise to 20 percent, will expose U.S. energy prices to weather-related price spikes.
• More than 1.2 million Americans have signed Newt Gingrich’s “Drill here. Drill now. Pay less.” petition.
• Efforts by San Francisco authorities to subvert federal law backfired when eight Honduran crack dealers flown to Southern California at the expense of city taxpayers escaped from a group home and are now at large.