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Morning Bell: Cutting Taxes for Growth and Fairness

Posted By Conn Carroll On December 8, 2008 @ 8:44 am In Ongoing Priorities | Comments Disabled

Throughout his 1992 campaign, then-candidate Bill Clinton promised tax cuts for the middle class. By the time he was sworn into office in 1993, though, Clinton said he would have to “revisit [1]” his tax-cut plan and was “absolutely mystified [1]” that the media had perceived it as a major pledge. A year later Americans punished Clinton by electing the first Republican Congress in more than 40 years. President-elect Barack Obama also campaigned on a middle class tax cut, but so far, he seems intent on not repeating Clinton’s mistake. Yesterday on NBC’s “Meet the Press [2],” Obama reaffirmed his promise to cut taxes for 95% of working Americans:

Well, understand what my original tax plan was. It was a net tax cut. Ninety-five percent of working families would get tax relief. To help pay for that, people like you and me, Tom, who make more than a quarter million dollars a year, would play — pay slightly more. We’d essentially go back to the tax rates that existed back in the 1990s. My economic team right now is examining do we repeal that through legislation? Do we let it lapse so that when the Bush tax cuts expire they’re not renewed when it comes to wealthiest Americans? And we don’t yet know what the best approach is going to be, but the overall thrust is going to be that 95% of working families are going to get a tax cut, and the wealthiest Americans, who disproportionately benefited not only from tax cuts from the Bush administration but also disproportionately benefited when it comes to corporate profits and where the gains and productivity were going, they are going to give up a little bit more.

While it is encouraging to hear Obama plans to keep his tax cutting promise, there is much in his statement that is troubling — particularly his insistence on raising taxes on the individuals and entities “where the gains and productivity were going.” A government that raises taxes on the most productive parts of an economy impedes, not encourages growth. The Heritage Foundation sincerely hopes that Obama listens to his Council of Economic Advisers chairman Christina Romer closely. As a economics professor at the University of California at Berkeley, Romer published papers concluding: 1) tax increases harm economic growth [3]; 2) tax cuts lead to greater economic activity [4]; and 3) government spending has at best a small effect on stimulating economic activity [5].

To best promote broad economic growth and stronger benefits for the middle class, Heritage’s memo to Obama on taxes [6] recommends:

  • Reduce marginal tax rates and the total tax burden on taxpaying families: For most Americans, a pledge of “broad-based tax relief” or to “cut taxes” does not mean narrow tax breaks restricted to families who engage in activities that Washington decides are worthy. Instead of targeted tax relief for groups preferred by Washington, reducing marginal tax rates for all would provide larger incentives for work, innovation and entrepreneurship.
  • Cut taxes for everyone, and do not increase taxes on those who are most likely to save and invest: The income tax is already highly progressive. Those who earn more than $250,000 already pay about 48% of all income taxes, yet Obama is still promising to raise their taxes to have them pay an even greater share. On the other hand, 43 million tax filers — nearly one-third of the 135.7 million who filed in 2006 — paid no federal income taxes at all [7] after credits, deductions and exemptions.
  • Lower capital gains taxes generally, not just on small firms: Small businesses and start-ups are important engines of job growth in our economy, and cutting capital gains taxes for them is an effective way to stimulate this sector because small and start-up firms depend on venture capital and invested savings. However, lowering taxes on only some capital investments is very difficult to apply in practice and likely to be counterproductive. Obama’s limited capital gains tax proposal would be difficult to implement, would make the tax code even more complex, and would be less effective in stimulating economic activity than you desire.

Obama’s promise to cut taxes on 95% of Americans struck a strong chord with voters, and his pledge to lower the capital gains tax makes strong economic sense. But cutting taxes only for the selected groups Obama targeted in the campaign and then raising them for high-earners will not generate the growth America needs. Obama’s first priority when taking office must be to help stabilize a flagging economy, and that means lowering taxes for all Americans.

Quick Hits:


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

URL to article: http://blog.heritage.org/2008/12/08/morning-bell-cutting-taxes-for-growth-and-fairness/

URLs in this post:

[1] revisit: http://www.iht.com/articles/1993/01/15/cut1.php

[2] Meet the Press: http://www.msnbc.msn.com/id/28097635/

[3] tax increases harm economic growth: http://www.nber.org/papers/w13264

[4] tax cuts lead to greater economic activity: http://www.econ.berkeley.edu/~cromer/draft507.pdf

[5] government spending has at best a small effect on stimulating economic activity: http://www.nber.org/papers/w4765

[6] memo to Obama on taxes: http://www.heritage.org/Research/Taxes/sr29.cfm

[7] paid no federal income taxes at all: http://www.taxfoundation.org/news/show/250.html

[8] successful destruction: http://news.bbc.co.uk/2/hi/europe/7768642.stm

[9] the proven success of our missile defense system: http://www.foundry.org/2008/12/05/morning-bell-moving-forward-with-missile-defense/

[10] arrested the Lashkar-e-Taiba militant group leader: http://www.timesonline.co.uk/tol/news/world/asia/article5305642.ece

[11] Pakistan’s main spy service allowed Lashkar-e-Taiba to train and raise money: http://www.nytimes.com/2008/12/08/world/asia/08terror.html?_r=1&ref=todayspaper

[12] government takeover of ailing private industries: http://www.nytimes.com/2008/12/08/world/europe/08kremlin.html?ref=todayspaper

[13] tight government control of the ailing American auto industry: http://www.nytimes.com/2008/12/08/washington/08autos.html?ref=todayspaper

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