Wednesday, October 29, 2008

The Obama Tax Plan - What it Really Means for America

A recent Obama television ad touts the benefits of Obama's tax plan to the middle class American. What the ad leaves out is that Obama plans to raise taxes on those that make $250k or more per year. More precisely, he plans to let the Bush tax cuts expire for those individuals. However, given his drastic plans to spend your money we all know that the tax increases on the "wealthy" will far exceed Obama's modest predictions. In addition, when his tax revenues come in far under predictions (because of the recessionary economy compounded by the stagnation produced by his tax plan) those tax increases will extend far below the $250k mark. But he will be drastically reducing the tax burden on millions of Americans... because when you're out of a job you won't have any tax liability.

The Real Impacts of Obama's Tax Plan

Obama's campaign likes to criticize McCain for providing tax breaks for the wealthy. What people forget is that the wealthy are already paying more, as a percentage of their income, through our progressive tax system. Currently, wealthy individuals pay 35% income tax plus almost 16% for FICA (if they're self employed). That's 51% of their income to the government. Obama's current plan would increase that by another 3% to 54%! Someone making $35k or less currently pays 15% plus 8% FICA (assuming they're not self-employed) for a total of 23%. Under Obama's current plan they would pay even less. In fact, Obama wants to give money to people who have no tax liability - funded by the "wealthy".

In a time when we're all hurting economically, it may seem just to stick it to the wealthy and make them pay an even more disproportionate share of the tax burden. However, Fred Thompson said it best when he commented during his campaign that, "[It doesn't make sense to talk about business tax breaks] unless you buy your groceries from a business, you buy your fas from a business..." Higher tax rates on businesses and wealthy individuals are bad because it takes away from the business' bottom line. Unlike the image Obama likes to portray, businesses are not the personal checkbooks for the government to fund social programs. Taking more money out of business has a real impact because businesses have to remain solvent, unlike the government. If a company has less money at the end of the year because the government took more then it has less to pay its employees, less to reinvest in new technology, less to purchase other goods and services. In short, more taxes hurt businesses and take money out of the economy. In a tight credit market like we currently have, no on in their right mind should be taking more money out of the economy.

Likewise, for "wealthy" individuals. The common myth is that rich people horde their money away and "steal" it from the poor. But no logical wealthy individual would do so. At a minimum they deposit it in a bank account from which the bank makes loans or other investments. More commonly, they invest in businesses, stocks, bonds, mutual funds, and the list goes on. Even when they buy luxury goods that is supporting another company and the jobs that company creates.

Furthermore, Obama's tax plan greatly burdens small business. Many small businesses are sole proprietorships, LLCs, LLPs, and partnerships. These companies are commonly taxed as partnerships which means the individual owner(s) is/are responsible for the income of the business on their individual tax returns. When I owned my own LLC company we paid taxes on the income we generated whether or not that money was reinvested in the company. Therefore, Obama's plan takes money directly out of small business and away from the families running those businesses.

Worst of all, Obama's plan further penalizes success (our progressive tax system already does this). Doing so discourages investment in new technology and new business. The net result of Obama's tax plan is to stagnate business growth and further embroil our country in financial ruin. Obama may claim that McCain's plan is analogous to taking the economic car that Bush sent off course and stepping on the gas, but Obama's plan is like taking that car, stepping on the gas, and jerking the wheel into a bridge embankment.

Diffusing Another Myth

I don't know how many times I've heard the uninformed argue that the wealthy may be taxed at a higher rate but they have more tax "loopholes". We call those deductions and they're well deserved. The alternative is repetitive taxation of the same money. For instance, the money a company pays its employees is deducted from its taxable income. Why? Because the employees will be taxed on that money as their income. If the company paid taxes on that money then the employee paid taxes again it would be double taxation. The dividend tax (improved under Bush) is the same. Dividends used to be paid out of corporate net income that was already taxed; in turn, the investor would pay income taxes on those dividends - double taxation.

To say that corporations and wealthy individuals have a lot of tax breaks is foolish because eventually that money gets taxed. Deductions are a means to prevent taxing the same revenue streams multiple times.

Further Obama Idiocy

Obama frequently states that he wants to end tax breaks for companies that send jobs overseas. Such tax breaks don't exist. Companies do not pay US taxes on work that is done overseas; so if the other country has a lower tax rate then the company pays lower taxes than it would have if the work was done domestically. So what Obama intends is to double tax those companies or impose tariffs. Regardless of the precise method chosen to "end the tax breaks" it will be perceived by other nations as a tariff and the same restrictions will be imposed on the US by those countries. This is a no win situation. Instead of outsourcing or offshoring some of their work, companies will just move all their work, and their companies, overseas to avoid the paralyzing taxation in our country. Meanwhile, we in the US will see a decline in jobs and an increase in the cost of goods and services.

Obama also plans to "rework" NAFTA. (Note that NAFTA was a Clinton administration creation.) However, we have seen an increase in jobs since the free trade agreements were enacted. Ever wonder why Japanese auto makers started employing engineers and line workers in the US instead of Japan? Free trade (yes, I know, this is not NAFTA).

Obama doesn't have a clue when it comes to the economy. He is an attorney and he thinks of economics in terms of who we can punish for what via which new tax. Supply and demand are foreign concepts in Obama's world and his policies are dangerous for a country in this economic situation. None of this is very surprising considering his campaign's economic advisor is the former CEO of Fannie Mae.

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