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The American Voice Institute of Public Policy Blogs the Issues!

Monday, November 3, 2008

By Joel P. Rutkowski, Ph.D., President

Senator Obama says you're selfish if you do not support his welfare nation

Democrat Presidential candidate US Senator of Illinois Barack Obama on October 31, 2008, in Sarasota, Florida said that the reason he wanted to change the tax code is that he did not have anything against the rich. He stated, “ I love rich people! I want all of you to be rich. Go for it. That's the American dream, that's the American way, that's terrific.  The point is, though, that -- and it's not just charity, it's not just that I want to help the middle class and working people who are trying to get in the middle class -- it's that when we actually make sure that everybody's got a shot – when young people can all go to college, when everybody's got decent health care, when everybody's got a little more money at the end of the month – then guess what? Everybody starts spending that money, they decide maybe I can afford a new car, maybe I can afford a computer for my child. They can buy the products and services that businesses are selling and everybody is better off. All boats rise. That's what happened in the 1990s, that's what we need to restore. And that's what I'm gonna do as president of the United States of America.” Senator Obama continued, "John McCain and Sarah Palin — they call this socialistic. You know I don't know when, when they decided they wanted to make a virtue out of selfishness." (1)

What should be disturbing to every hard working taxpayer is that the heart of Senator Obama's tax cut is for those that do not pay taxes, in other words a welfare payment.  According to the non-partisan Tax Policy Center, Senator Obama's plan to cut taxes on 95 percent of taxpayers would effectively increase government spending by an average of $64.8 billion annually and effectively increase income tax rates for many taxpayers, even on some earning $20,000 - 50,000.00 annually. (2)

Senator Obama's plan would give refunds to 60.7 million people who have no tax burden at all. And according to the Tax Policy Center after-tax income will decline under the plan nearly 2 percent for 20 percent of the taxpayers, who pay 87.5 percent of total income taxes.

Although only 62 percent of households pay any income tax at all, the heart of Senator Obama's tax cut is the use of refundable tax credits which allows the senator to claim he is giving a tax cut to 95 percent of households. To some households that do not pay taxes including a plan to make community college “essentially free” and pay 10 percent of the interest on all mortgages, the Obama tax plan gives money to some households that do not pay taxes.

According to the Tax Policy Center the problem with Senator Obama's characterization of refundable credits as tax cuts, is that the credits are calculated as outlays, or direct spending not as reduction in tax rates. Hence, some of Senator Obama's tax cuts are actually spending increases in budgetary terms. In fact, Senator Obama's spending proposal is so large that they effectively eliminate taxes for 15 million households, increasing the percentage of households that do not pay taxes from a 37.8 percent to 48.1 percent estimates the Tax Policy Center.

Since Senator Obama relies on phase-in and phase-out proposals to target his refunds toward the lowest-earning tax brackets, refunds get smaller as tax burdens get larger, which means that while it is true that 95 percent of the workers receive some form of tax refund they will not all receive a full refund. The maximum and minimum income levels needed to qualify for the credit are dependent on phase-in and phase-out ranges.

The Tax Policy Center has indicated that it is phase-out requirements that result in a general decrease of the refunds for individuals earning over $75,000 annually. Of all Americans, this bracket includes nearly 40 percent and of total income taxes nearly 20 percent.

Individuals earning $20,000- $50,000 annually would see their effective tax rates — the amount of money the taxpayer actually pays the government — increase on average under Senator Obama's plan when compared with current laws.

Furthermore, under Senator Obama's plan relative to current law most households making $30,000 – $75,000 annually would not see a reduction in their taxes. And those making less than $30,000, annually and those making $75,000-$200,000 annually would be the only level that will see a majority of its effective tax burden reduced under Senator Obama's plan.

Obama's Social Security Welfare Plan

For low-earners, Senator Obama proposes a Social Security payroll tax cut. The full 6.2 percent employee share of the 12.4 percent total payroll tax, up to $500.00 annually would be given workers earning up to $8,000 annually. Workers earning over $8,000 would continue to receive $500.00 each, but it would be phased out for people earning between 75,000 and 80,000.

An already progressive Social Security program would be made even more redistributive by this tax cut. A very low earner receives an inflation-adjusted return on their Social Security taxes of about 4 percent under current law. Given that government bonds are projected to return less than 3 percent above inflation this is a very good return. For very low earners, returns would increase to about 6 percent above inflation – about the same return as on stocks, except without none of their risk under Senator Obama‘s proposal. And the difference in the “deal” offered to workers of different earning levels would be extreme –compounded over a lifetime's contribution.

This plan goes too far in risks turning Social Security into a “welfare program,” given Social Security has always been progressive.   Compared, to the taxes they pay. lower earners would receive more in benefits which means their “net tax” is already negative and the net subsidies from the program would be increased under Senator Obama's plan.

Furthermore, over the next 10 years, Social Security's tax revenues would be reduced by about $710 billion by Senator Obama's payroll tax cut plan. Social Security's long – term deficit would be increased by almost 60 percent if Senator Obama ‘s tax cut was made permanent which would cause the program to go into insolvency in 2034 instead of 2041, according to current projections. (3)

Senator Obama's Tax Increase Plan

Senator Obama has suggested raising almost every federal tax. President Reagan created the historic economic boom of the 1980's by reducing marginal tax rates.  However, Senator Obama proposes to do exactly the opposite and sharply increase the marginal tax rate for almost every federal tax. Since incentives for savings, investment, entrepreneurship, business expansion, job creation, work and economic growth are greatly diminished by increases in these marginal tax rates, the economy will be greatly harmed.

Senator Obama has proposed: 

1. To increase the top individual income tax rate by 13 percent and by 10 percent the second individual income tax rate.

2.To increase by 33 percent the capital gains tax rate.

3.To increase the dividends tax rate by 33 percent.

4.To raise between 16– 32 percent the top payroll tax rate.

5.To help finance national health insurance, Senator Obama proposes a new payroll tax on employers.

6.To reinstate the death tax that under current law is being phased out, with a new top marginal tax rate of 45 percent.

7.For corporations, Senator Obama has proposed tax increases such as the windfall profits tax on oil companies.

8.Higher tariff taxes have been proposed by Senator Obama's protectionist trade policy.

Senator Obama's tax plan would increase taxes by $627 billion over 10 years estimates the Tax Policy Center. (4)

Windfall-profits tax on the oil industry

Congress passed a windfall-profits tax on the oil industry in 1980 after gasoline prices skyrocketed in the 1970's.  This was not a very good idea and most observers now acknowledge this. For example, over its eight-year life span the tax generated far less revenue than anticipated. And according to an analysis released in March 2006 by the Congressional Research Service domestic oil production was reduced by as much as 4.8 percent which represented the lowest level in two decades. (5)

Domestic producers had fallen behind in their search for new oil reserves as demand continued to increase. The United States (U.S.) had increased its reliance on foreign oil supplies as a result. The U.S. had derived about 32 percent of its energy from foreign sources in 1983 and this figure increased to 38 percent by 1986 according to the American Petroleum Institute. (6)

For both taxpayers and the Internal Revenue Service (IRS), the tax had proven to be a heavy administrative burden. Annual compliance costs of $40-$50 million were claimed by oil industry representatives (such costs are passed onto the consumer in higher prices.) And to collect the tax, the IRS was spending as much as $15 million annually. The windfall-profits tax was called “perhaps the largest and most complex tax ever levied on a U.S. industry,”  by a 1984 General Accounting Office report. (7) Congress agreed to repeal the tax in August 1988.  At a time of economic uncertainty Americans should not have to pay higher energy costs because of windfall-profits tax.  Such a tax will only increase Americans' dependence on foreign energy sources and will result in higher prices for energy that will be passed onto the consumer because the oil industry has to pay higher taxes. In the end, higher energy costs represent just another stealth tax increase that the American government forces unto the consumer.

Final Thoughts

As it became increasingly clear from the polls that Democrat Presidential candidate US Senator of Illinois Barack Obama might win the Presidency and Democrats could gain significant majorities in both the House of Representatives and the Senate that would result in the passage of a radical economic agenda, the stock market declined dramatically over the past weeks predicting a gloomy economic future.

From history, investors have learned unlike Senator Barack Obama and the Democrats that five major policy errors helped turn the 1929 economic downturn into a full-blown Depression that lasted over ten years. And these five major policy errors are being proposed by Senator Barack Obama which include tax increases, protectionism, massive new government spending programs ($1.32 trillion over the next 10 years), empowered labor unions, and crippling government regulation. (8)

In the early days of their rule Russian Communists passionately proclaimed income equality as a principle to be enforced from the first instance of the proletarians' seizure of power.  (9) A plan designed for the step-by-step transformation of capitalism into socialism is set-forth in the Communist Manifesto by Karl Marx and Friedrich Engels. The battle of democracy should be won by the proletarians and they should rise themselves to the position of the ruling class. Then their political supremacy should be used to wrest “by degrees” all capitalism from the bourgeoisie.  (10)  Although Senator Barack Obama will vehemently deny in the closing days of this election cycle that he is not a Marxist, his economic policies of redistribution of wealth simply are just that. His vision for America is totally contrary to the beliefs and values that Founding Fathers intended for this nation.  Simply, if elected President,  Senator Barack Obama will destroy the traditions and institutions that have made America the greatest nation in the history of mankind and the envy of the nations of the world.

Endnotes

  1. Jake Tapper, “Obama's New Attack on Those Who Don't Want Higher Taxes: ‘Selfishness,'” ABC News.com, October 31, 2008.
  2. Matt Cover, “Obama's Tax Cut is Actually a Spending Increase, Says Non-Partisan Group,” CNSNews.com, October 15, 2008.
  3. Andrew G. Biggs, “Obama Wants Social Security to Be a Welfare Plan, “ The Wall Street Journal, October 24, 2008.
  4. Peter Ferrara, “Obama's Tax Plan: Welcome to 1929,” Human Events.com, October 6, 2008.
  5. David Lazarus, “Bush is right about oil windfall-profits tax,” The San Francisco Chronicle, May 3, 2006.
  6. Joseph J. Thorndike,” Historical Perspective: The Windfall Profits Tax –Career of a Concept, Tax Analysts, November 10, 2005.
  7. Ibid.
  8. Pat Toomey, “Obama's Stock,” National Review Online, October 30, 2008.
  9. Ludwig Von Mises, Planned Chaos, The Foundation For Economic Education, Inc, Irvington-on-Hudson, New York, 1970.
  10. Ludwig Von Mises, Planning For Freedom, Second edition, Libertarian Press, South Holland, Illinois, 1963.

 

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