WingRight

Sorry that it’s taken three posts to wrap up commentary on a New York Times paen to Obamanomics. (See here and here for prior entries)

First topic - the Corporate Income Tax

For now, the people running the party, be they in the Bush administration or the McCain campaign, evidently do not share this concern. They have responded to Obama’s tax proposals with the same kind of attacks that the party has been using since the 1980s. First, they have argued that Obama’s tax increases would end up hitting every income group. Strictly speaking, this is true. Obama’s increase on the corporate income tax would ultimately fall on all stockholders, even poor ones. In practical terms, though, most families own little enough stock that the other features of the tax plan would matter far, far more. That’s why the Tax Policy Center numbers, which include the corporate tax increase, come out as they do.

So if you don’t own stock, then a higher corporate income tax rate doesn’t hurt you? Wrong.

A high corporate income tax comes out of the pockets of the employees more than anyone else. According to a study by the Congressional Budget Office (I know they’re not very accurate, but when they find a bad tax, you know it’s bad), 70% of the corporate tax burden is borne by workers in the form of lower wages and fewer high-paying jobs.

Corporations may write the checks, but employees, shareholders and customers provide the money to pay corporate income taxes.

Next - The Clinton Years

When Bill Clinton raised taxes on upper-income families in 1993, his supply-side critics insisted that he would ruin the economy. As we now know, Clinton presided over the longest economic expansion on record, the fastest income growth most workers had experienced in a generation and the disappearance of the federal-budget deficit. His successor, Bush, then did exactly what the supply-siders wanted, cutting upper-income tax rates, and the results were much worse. Economic growth wasn’t quite as strong or nearly as widespread, and the deficit returned. At the very least, Clinton’s increases did no discernible economic damage. Rubin, citing academic work on tax rates, made the case to me that rates under an Obama administration would not be nearly high enough to stifle innovation.

Let’s look at the economy during the Clinton years. A couple of factors that Bill had nothing to do with had a tremendous impact on the economy. You had giant growth in the high tech sector because of two factors - the entry of the PC into a zillion businesses in the United States and giant expenditures for hardware, software and programmers to fix Y2K problems. The entry of the PC generated tremendous productivity increases that buoyed the economy.

Outside of high tech, the Cold War had ended and oil prices were in the process of dropping to $11 per barrel. The economy was coming out of a mild recession in 1991-92, so, prior to the tax increase, all indicators were up. Despite all of these upward drivers, per the Heritage Foundation, during the four years following the Clinton tax hike (93-96), growth was modest:

* The economy grew at an average annual rate of 3.2 percent in inflation-adjusted terms;
* Employment rose by 11.6 million jobs;
* Average real hourly wages rose a total of five cents per hour; and
* Total market capitalization of the S&P 500 rose 78 percent in inflation-adjusted terms.

What the “Good Old Clinton Days” economic historians fail to mention is that, following the Republican takeover of Congress, in 1997, the Republican-led Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton. The 1997 bill:

* Lowered the top capital gains tax rate from 28 percent to 20 percent;
* Created a new $500 child tax credit;
* Phased in an increase in the estate tax exemption from $600,000 to $1 million;
* Established Roth IRAs and increased the income limits for deductible IRAs;
* Established education IRAs;
* Conformed AMT depreciation lives to regular tax lives; and other stuff.

The “Clinton Boom” happened after the 1997 tax cut, not after the 1993 tax hike. Between the lowering of capital gains taxes, the introduction of Roth IRAs and education IRAs and the increase income limits for regular IRAs, the 97 cut was extremely friendly to capital investment and growth. When tax policy and rates are friendly to capital investment and growth, you get more of each and the whole country does better.

The lower tax rates of of the 1997 tax cut lead directly to the lowering and elimination of the federal deficit.

Tags: Liberal "Solutions", Taxes //