The middle class may be slow to embrace the Obama economic plan for good reason. It defies the policy lessons learned from 50 years of economic expansion in the United States. John McCain offers a plan to incent businesses, entrepreneurs, and foreign investment leading to economic growth, job creation, and higher wages.
Barack Obama claims that our economy is now feeling the effects of eight years of President Bush’s failed economic policy and President Reagan’s supply-side policies that “never trickled down”.ÿ Liberal dogma imbues Senator Obama’s economic policy, instead of the historical relationship between tax rates, treasury revenues and economic growth. The middle class is slow to embrace Obama’s plan for working families because it defies what we have learned from fifty years of economic expansion.
In 1962, President John F. Kennedy told Congress that the federal tax burden reduced the financial incentives for personal effort, investment, and risk-taking. He proposed the largest tax cut in American history with rate reductions not only for low-income workers, but as he told Congress “for those in the middle and upper brackets, who can thereby be encouraged to undertake additional efforts and … invest more capital.” President Kennedy reduced the top marginal rate by 21%, and the nation’s economy expanded by 20% over the next three years.
In 1981, President Reagan inherited 7.6% unemployment and 13.5% inflation. His signature legislation cut the top marginal rate by another 20% (to 50%) and reduced taxes across the board. When President Reagan left office, unemployment was 5.5%, inflation tamed at 4.1%, and the American economy was 30% larger than it was when he came to Washington.
The other impact of lower tax rates is higher treasury revenues. When President Clinton cut the capital gains tax rate from 28% to 20% in 1997, capital gains receipts doubled in four years. When President Bush again cut the capital gains rate to 15% in 2003, capital gains tax revenues doubled. The pattern is clear. Economic growth is a more useful tool for increasing treasury revenues, than higher tax rates. Senator Obama claims to understand this, but says we need more fairness. While his plan is crafted to increase fairness, it will not do much for growth, which means it is likely to produce neither.
Tax cuts continue to be popular with the American people, even if President Bush is not. That’s why Senator Obama talks about “tax cuts” for 95% of Americans. The Tax Policy Center estimates that 40% of filers will have zero income tax liability in 2008, which means Obama’s “tax cut” is a plan to put middle class families on the welfare rolls.ÿ If Obama wants the rich to pay a higher share of the overall tax burden, he should continue down the path paved by Ronald Reagan and George W. Bush. Since 1981, the share of taxes paid by the top 1% of earners has increased from 17% to 39%. Obama would like to see this figure soar higher, but he ignores the policy that achieved it. The marginal rate on these filers has been cut in half, and the capital gains rate is currently one-third of the 1981 level.
John McCain has promised to preserve key elements of the 2001 tax cuts that are set to expire in 2010. These include keeping the top marginal tax rate at 35 percent, maintaining 15 percent rates on dividends and capital gains, and phasing out the Alternative Minimum Tax. Most importantly, Senator McCain has proposed cutting the corporate tax rate from 35% to 25%. The United States now has the second highest corporate tax rate in the world. On this issue, the candidate of change is satisfied with the status quo. It is time for a bold economic agenda to show the world that America is open for business.
Ohio’s now-famous “Joe the Plumber” was told by Barack Obama that his plan would, “spread the wealth around”. You might expect a candidate who believes so strongly in spreading the wealth around to have given more than 4% of his $3.8 million income (since 2000) to charity. Many Republicans and Democrats can agree that enabling the marginalized in our nation is a worthy policy aim. However, Washington’s record of stewarding taxpayer dollars to maximize program outcomes does not inspire confidence for a larger role in spreading the wealth around.
John McCain sees what many middle class voters see – the majority of Republicans and Democrats lack the political courage to make difficult decisions about spending our tax dollars. This is a fair criticism of the Reagan and Bush economic records. Both presidents demonstrated great political courage, but chose to use it on other issues. Federal spending grew faster than the increased treasury revenues, and as a result, federal deficits grew on their watch.
Obama’s political career has been inspiring and remarkable, but it has not been courageous. Obama has been the most reliable doctrinaire liberal in the Senate. He has never made a legislative decision that would put him at odds with the far left wing of the Democratic Party. Most Americans are not yearning for a leader who promises to ease their troubles by adding them to the government dole. Americans are ready for a leader who will confront our challenges with competence, and make difficult decisions on health care, retirement, education, and foreign policy. An Obama Administration working with a Democratic House and Senate promises to be another rubber-stamp relationship between the executive and legislative branches.
Finally, working class voters in the heartland have been insulted on these pages and many others for voting Republican. One angle of the argument insults the issues that inform their vote, while another suggests voting Republican is an economically unsophisticated decision. The argument continues that these Americans would be better off to accept income transfers to pay for their health care, education, and retirement. Go to any neighborhood in the country where the majority of the population is dependent on the government to provide their basic needs, and you can be sure it is a place you would never want to live or start a business. You can understand why heartland voters might be slow to embrace Obama’s plan for the middle class.