This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published June 21, 2012 on Forbes.com.
Last week on June 14, President Obama announced his economic plan to finally bring economic recovery and growth to the U.S. in a much ballyhooed address in Cleveland. He threw down the gauntlet to Mitt Romney on the issue, saying “more than anything else, this election presents a choice between two fundamentally different visions of how to create strong sustained growth; how to pay down our long term debt; and most of all, how to generate good, middle-class jobs….”
Truer words have never been spoken by the President. So let’s examine the two fundamentally different visions and see which can produce strong sustained growth, pay down our long term debt, and generate good, middle class jobs.
Under President Obama’s plan, on January 1 of next year the top tax rates of virtually every major federal tax will increase, as already enacted under current law. That is because the tax increases of Obamacare would go into effect, and the Bush tax cuts would expire, which Obama refuses to renew for singles making over $200,000 a year, and couples making over $250,000. The English translation of that target for the tax increases is the nation’s small businesses, job creators and investors.
As a result, with the Bush tax cuts just expiring for these targeted taxpayers, the top 2 income tax rates would jump by nearly 20%, the capital gains tax would soar by nearly 60%, the tax on dividends would nearly triple, the Medicare payroll tax would skyrocket by 62% for the above disfavored taxpayers, and the top death tax rate would rise from the grave to 55%.
That is all on top of the highest corporate tax rate in the industrialized world at nearly 40%; counting the federal corporate rate of 35% and state corporate rates on average. But under Obama, there is no relief in sight. Instead, Obama is pushing still more tax increases. Under his proposed Buffett rule, the capital gains tax rate would increase by 100%, and would be the fourth highest in the industrialized world. Many OECD countries, in fact, impose no capital gains tax because it is just another layer of taxation on capital income on top of the corporate and individual income taxes. All of this would leave American businesses uncompetitive in the global economy.
How is this going to produce strong sustained growth and generate good middle class jobs? It is going to do just the opposite, as the multiple tax rate increases would only sharply reduce the incentive for productive activities, such as savings, investment, business expansion, business start ups, and job creation. That will simply encourage even more capital flight from the U.S., and a continued capital strike by the capital that remains. All this translates into yet another recession next year, with fewer jobs, rising unemployment, and soaring deficits and debt. This does not signal Obama fighting for the middle class; instead it points to him trashing the economic chances of the very voters whose favor he seeks.
The alternative GOP vision is spelled out in the budget produced by House Budget Committee Chairman Paul Ryan, which was passed by the Republican controlled House, and is supported by Romney. That includes individual tax reform closing loopholes and reducing tax rates to 25% for couples earning over $100,000 per year, and 10% for those making less, and corporate tax reform slashing crony capitalist loopholes and reducing the 35% federal rate to an internationally competitive 25%. And then the aforementioned Obama tax increases would be repealed. CBO has scored these tax reforms as restoring federal revenues to their long term, postwar, historical average from 1948 to 2008 of 18.5% of GDP.
The reduced tax rates under such reform would produce exactly the opposite results of Obama’s tax rate increases, increasing incentives for all of the above productive activities. That would restore traditional American prosperity and job creation as a result.
But in his speech in Cleveland, Obama opposed tax reform that would lower rates and close loopholes. He said it would be a tax increase on the middle class. The problem for Obama is that Ryan’s tax reform plan does not involve any tax increase for the middle class. His plan cuts tax rates for every taxpayer, including those in the middle class. And that has always been the Republican position.
President Reagan cut tax rates across the board for everyone, including the middle class, and expanded the personal exemption, which benefits middle and lower income taxpayers the most. President Bush cut tax rates for everyone, and for lower income workers by a greater proportion than for higher income workers. As a result, by 2007, before President Obama had even entered office, official IRS data showed that the middle 20% of all income earners, the true middle class, paid only 4.7% of all federal income taxes.
What Obama has done throughout his Presidency is the opposite of tax reform. He has expanded the loopholes and increased rates. Those loopholes have included new and expanded welfare tax credits and corporate welfare like his green energy handouts. When his own Simpson-Bowles Commission recommended real tax reform closing loopholes in return for reducing rates, Obama only paid lip service to it, but didn’t lift a finger to advance the proposal.
Problematic for Obama is that higher tax rates with more loopholes reduce economic growth, jobs and prosperity. The higher rates discourage critical job creating, pro-growth investment, and the loopholes distort markets and promote inefficiency and waste, which is a further drag on growth. Tax reform with lower rates and fewer loopholes, by sharp contrast, promotes powerful pro-growth incentives while reducing the inefficient drag of market distorting loopholes. That is why the bipartisan tax reform of 1986 under President Reagan, when America was under adult supervision, was so powerful in fueling the generation long, 25 year, Reagan boom from 1982 to 2007.
A second component of Obama’s plan is a blizzard of increased regulatory costs and barriers. The chief rainmaker here is the EPA, which is imposing through regulation the cap and trade legislation that even an overwhelmingly Democrat Congress refused to pass. That is just brewing up, but will effectively be another tax increase of trillions on the economy through higher electricity, gasoline, and other energy costs. Further EPA regulatory storms are forcing the shutdown of coal fired power plants all across the country, and preventing the construction of new ones, exactly the opposite of China. Interior and other regulatory authorities have set over 90% of available federal onshore and offshore jurisdictions off limits for oil and gas exploration and production. Obama’s regulatory minions have also refused to allow construction of the Keystone XL pipeline to bring Canadian oil to Gulf refineries.
Another storm front is building through hundreds of new regulations in the pipeline thanks to the Dodd-Frank legislation. Those added costs and barriers threaten the availability of business and consumer credit essential for economic recovery and new jobs. Further storm clouds arise from the Obamacare takeover of the entire health care sector, just starting to increase the costs of health insurance and care. The Obamacare employer mandate is already killing jobs before it even becomes effective, as potential employers know they will be required to buy the most expensive health coverage for each of their employees.
These added regulatory costs are all effective additional tax increases on the economy, adding still further to the prospects for renewed recession by next year. But in his Cleveland speech, Oba
ma just derided the idea of regulatory relief as a Romney GOP policy to “eliminate most regulations.” He characterized such relief as the “promise to roll back regulations on banks and polluters, on insurance companies and oil companies” and decried that, “They’ll roll back regulations designed to protect consumers and workers.”
But the Romney GOP plan is precisely to repeal all of the above costly and unnecessary regulatory burdens through the repeal of Obamacare and Dodd-Frank. These would all amount to further tax cuts, further boosting economic recovery, jobs and growth.
In his Cleveland speech, President Obama continued to propound his fundamental economic theory that what drives economic recovery, jobs and growth is increased government spending. That is why his 2013 budget proposes the highest government spending in world history, following an $800 billion, 27% increase in federal spending from 2008 to 2012, with a proposed 53% increase in annual federal spending from $3.8 trillion today to a record shattering $5.8 trillion by 2022. This President Obama budget proposes a very grand total of $47 trillion in spending over the entire 10 years, another all-time world record.
Is draining all of that money out of the private sector really going to create strong sustained growth, pay down our long term debt, and generate good, middle-class jobs? Or is it going to bring the chaos of Greece and Western Europe to America?
Just as Obama avoids any real tax reform, his budget also fails to propose any significant entitlement reform. As a result, CBO projects that under current policies authored by the Obama budget, federal spending soars to 30% of GDP by 2027, 40% by 2040, 50% by 2060, and 80% by 2080. That compares to the long term, postwar, stable, historical average of 20% of GDP that prevailed for 60 years from 1948 to 2008, under which America prospered as the strongest economy in world history. Obama’s Huge Government spending breakout from that stable, long term level is just the perfect Grecian formula for America, as it would undoubtedly create the same spending, deficit and debt crisis here that we see in Greece and Western Europe more generally.
Maybe that is why Obama’s budget won exactly zero votes on the floor of the House, including from any Democrat, and won the same Big Sombrero on the floor of the Senate. In sharp contrast, Ryan’s budget supported by Romney passed the House with bipartisan support. For all of the yelling and screaming over the Ryan budget, it simply returns federal spending to the long term, postwar historical average of 20% of GDP, within 3 years. It averts entirely the developing deficit and debt crisis by consistently reducing the national debt, until ultimately that debt is paid off entirely. That results from the operation over the years of Ryan’s spending and entitlement reforms to be adopted today, rather than future spending cuts.
But in Cleveland, Obama once again derided such highly desirable federal spending restraint back to the long-term postwar historical average as “strip[ping] down government to national security and a few other basic functions.” Obama claims that under the Ryan budget, “here’s some of what would happen if that cut that they’ve proposed was spread evenly across the budget: 10 million college students would lose an average of $1,000 each in financial aid, 200,000 children would lose the chance to get an early education in the Head Start program. There would be 1,600 fewer medical research grants for things like Alzheimers and cancer and AIDS; 4,000 fewer scientific research grants, eliminating support for 48,000 researchers, students and teachers.”
Of course Obama’s lead in, “if that cut they’ve proposed was spread evenly across the budget,” is the tip off that all of this is fabricated. For the Ryan budget proposes no across the board spending cuts spread evenly across the budget. It focuses on wasteful and unnecessary spending that needs to be cut, and fundamental entitlement reform that solves the long term problem, leadership that Obama fails to provide. Instead Obama demagogues Ryan’s proposals, saying they would “turn Medicare into a voucher program, which will shift more costs to seniors and eventually end the program as we know it.” But Ryan’s Medicare would serve seniors far better than Medicare under Obamacare, which would actually end Medicare as we know it, as I have explained before. Obama further proclaims that Ryan’s proposals “would take away coverage from another 19 million Americans who rely on Medicaid – including millions of nursing home patients, and families with autism and other disabilities.” In truth, Ryan’s Medicaid would be better for the poor and needy than Obama’s Medicaid, as I have also explained in detail elsewhere.
Obama has been President for almost 4 years now, and does not have a good record of producing strong sustained growth, paying down our long term debt, and generating good, middle class jobs. So it should be no surprise that he is proposing for the future the opposite of everything that would produce those results. What Obamanomics has already given us is the worst recovery from any recession since the Great Depression, with the slowest growth and the highest long term unemployment, as I have also discussed elsewhere. That is why the Census Bureau reports real middle class wages and income are declining, with more Americans in poverty today than at any time in the more than 50 years that Census has been tracking poverty. And no, Obama can’t say that is because the recession was so bad, because America’s historical record is the worse the recession the stronger the recovery. Based on that historical record, we should be in the third year of a booming economic recovery by now.
So Obama doesn’t have any credibility on how to produce strong sustained growth, pay down our long term debt, and generate good, middle class jobs. Based on Obama’s economic address in Cleveland, the real question in this election is whether this is still America, or whether it is now Argentina.