Class warfare makes bad economics

Guest post by Daniel Wilson

In the name of class warfare politics, President Obama released a budget with $1.7 trillion in tax hikes over the next decade targeting successful earners, including small businesses, corporations and entrepreneurs. These taxes may only apply to individuals and businesses earning more than $200,000 a year, but will adversely affect every American, including college students.

In a jobless recovery with over 13 million Americans out of work, the last thing you want to do is impose higher marginal tax rates on job creators. Around 75 percent of tax filers in the highest tax bracket report business income, according to the Tax Foundation. [1] Higher taxes on businesses will most certainly destroy jobs. Businesses will have less after-tax income to expand production and employment. In addition, the incentives to make new investments in potential breakthroughs are minimized since you’re asking investors to take risks for a diminished rate of return from inflated confiscatory tax rates.

Take a look at the capital gains tax which Obama wants to raise from 15 to 24 percent. Capital gains taxes are paid whenever you sell an asset, such as a bond or a stock, for a profit. Higher taxes on capital gains will miss allocate resources by encouraging consumption over investing. Since investments are now being taxed at a higher rate, consumption becomes more attractive. Currently, the U.S. economy desperately lacks capital investments and way over consumes, so this only worsens that imbalance. Also, a higher capital gains tax chases capital overseas to countries like Switzerland that have no capital gains tax at all, destroying American jobs in the process. Lastly, everybody who owns stocks, which is roughly half of all Americans, will have a devalued portfolio from a higher capital gains tax. The higher tax lowers the reward from owning a stock, which then reduces the demand for stocks, causing the entire stock market to be worth less. Since savings and investments are the key to long-term economic growth the capital gains tax should be abolished, not raised.

Even though most economists believe higher taxes retard economic prosperity, the Obama administration is sold on the belief that the rich in this country, such as Warren Buffett and  Mitt Romney, need to pay an elevated tax rate. Obama wrongfully claims that very wealthy  individuals earning their income through capital gains and dividends get off with a lower tax rate than a secretary. This common fallacy completely ignores the double taxation of corporate income. Capital gains and dividends are taxed at a preferential rate of 15 percent because that same income has already been taxed at a rate of 35 percent at the corporate level. In other words, when a corporation earns a profit it has to pay corporate taxes on its earnings and then when the retained earnings are distributed to shareholders through dividends the income is taxed again at a rate of 15 percent.  In actuality, as The Wall Street Journal recently pointed out on January 27, 2012, Romney and Buffett have a tax rate closer to 40 percent.

As far as the rich not paying their fair share, the top 1 percent pays nearly 40 percent of all the income taxes while the bottom 45 percent pays nothing, according to the IRS. Also, a study by the OECD in 2008 showed that the richest 10 percent of households in the United States have the highest ratio of income taxes paid to the share of income earned, giving the U.S. the most progressive income tax system in the industrialized world.

Higher taxes on productive behavior is detrimental for society as a whole, living standards and economic growth become compromised when innovations and hard work get penalized by draconian tax rates. The rich already pay more than their fair share, and asking them to pay additional taxes will only derail the economy.

 


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[1] http://www.taxfoundation.org/files/sr185.pdf

Daniel Wilson is a senior who is majoring in economics at James Madison University.

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