Obama is famous for selling himself as friendly to families in the working-class tax brackets. His oft-quoted line is, of course, that he’s going to offer a tax cut for 95 percent of American workers and their families. This figure is challenged by the Tax Policy Center, which critiqued the details of Obama plan and concluded that this number would be closer to 81 percent of households that would see a tax decrease and 10 percent would see a tax hike. Married couples, in particular, are at greatest risk for a tax increase.
Another substantial claim made by Obama is that anyone making under $200,000 is going to see a tax cut. However, Obama’s “Making Work Pay” credit, which offers workers an additional 6.2 percemt of $8,100 maximum of their earnings, phases out quickly as you approach the $80,000 mark. As a result, low income earners, who pay no income tax at all, can get up to a $500 check, but earners of above $150,000 per year will see nothing at all. This is the (right) magic number cited by Joe Biden as the maximum salary the Obama plan is designed to help.
Obama’s $200,000 remark is patently false, for none of his specific policies are designed to cut taxes for this level of earner. His child care credit maxes out at $58,000, his exemption for senior citizens at $60,000, the $4,000 in college tax credits – really a payment for community service work — phases out as family income rises from $100,000 to $120,000.
The Obama plan won’t actually help all the people he says that it’s going to help, according to a study done by the Tax Foundation. On the surface, Obama’s tax cuts and redistribution plans seem to put more money into the hands of those who need it. In a progressive taxation system, however, the real tax rate doesn’t provide an accurate assessment of tax obligations. This is because the deductions available at each tax bracket creates a disparity between actual tax liabilities and taxable income, depending on what tax bracket you fit into.
The marginal tax rate is a measure of these two terms and, in real terms, gives an assessment of earning incentive. People faced with a high marginal tax rate have less incentive to increase their earnings potential, and jump into a higher tax bracket, because the extra money that would push them over would result in all their income being taxed more heavily. The incentive in a society with a high marginal tax rate is to stay in a lower tax bracket.
Almost surprisingly, in the Obama plan, the marginal tax rate would only fall for very low income earners, inclusive of a much smaller population that Obama claims to want to help. Other low, middle and high income earners could see their marginal tax rate rise a whopping 40 to 50 percent. The Obama plan, which is supposedly designed to get low income workers more money in their pockets — in order to spur innovation and investment from this sector — actually decreases the incentive for workers to increase their earnings potential. They will get taxed at a higher rate if they put in too many overtime hours, so there is less incentive to move out of their current tax bracket.
Another part of Obama’s plan is to push the Capital Gains tax to 25 percent. This is basically a tax on money earned through the investment of assets, rather than normal income, and will serve to stifle investment during a time when Wall Street is already suffering. So while Obama pretends to be friendly to business by leaving the corporate tax alone, he will cut out a much needed revenue source for publicly traded companies, which need investment to fund innovation and to stay competitive in global markets.
While the left thinks that raising the capital gains tax with allow lower income families to become more competitive in the business world, in reality, the bulk of investment does not and will not come from this sector, and spreading the wealth thinly around will not promote this policy, especially in light of high marginal tax rates. Companies need investment to make their products and services cheaper. This will allow lower income workers to save more of their own money and make their own investments. Markets are driven by entrepreneurs and innovation in a competitive market, which creates economic wealth for everyone and, by extension, more investment sources for itself. The government cannot hope to efficiently create this kind of economic wealth by raising taxes and affecting investment incentives. The market can do this efficiently and naturally.
So, while the government seeks to raise taxes to provide opportunities for lower incomes to increase their earnings potential and spur investment from the bottom up, this is not the way wealth is created. Government policy of economic interference stifles personal economic growth by increasing the marginal tax rate and stifles necessary free market growth. This is a double-edged sword, because government programs create a niche for themselves, where the recipients become more reliant on them for survival.
The Obama tax plan will ensure that lower income families will be stuck in a financial hole, and corporations will not be able to lower prices to help them out. As a result, Americans will be looking for even more government programs to fix the perceived failure of the free market, which is in actuality the failure of government programs to properly regulate the economy to create growth.
Economic bailouts, stimulus packages, increasing taxes to fund government programs to create growth. These are all the titles under which politicians operate to increase the scope of government. They tell us that only government can save the economy, that government is needed to create wealth for our nation’s poorest.
We must question, however, the extent to which the government can positively affect the economy, through fiscal and monetary policy. Do we really need government to create wealth from the “bottom up”? Isn’t wealth created at the bottom, for itself, when the free market can increase the economic wealth for all through innovation of entrepreneurs, in a process that is hindered by excessive taxation of these entrepreneurs?
