When Joe "the Plumber" Wurzelbacher got Barack Obama to concede, on camera, to admit "I think when you spread the wealth around, it’s good for everybody", it just fleshed out what everyone already knew. Similarly, walking gaffe machine Joe Biden on ABC-TV's "Good Morning America" noted that wealthier Americans will pay higher taxes under Obama: "It's time to be patriotic ... time to jump in, time to be part of the deal, time to help get America out of the rut." [Apparently Obama and Biden are calling only on the upper 5% of American workers to be "patriotic". By this definition, some 40 million American workers are not "patriotic" at all, because they don't pay federal income tax. Perhaps the ones who get tax credit checks should be considered "treasonous"?]
Raising the 35% tax bracket to Clinton's original 39.6% has been a given from the get-go; in fact, it is part of the Democratic Party myth of the fabled Clinton economic expansion era, although it looks like Obama is trying to co-opt the Bush lower labor tax brackets. [My understanding is that the dynamic effects, i.e., the extent to which tax cuts pay for themselves via higher growth, are more pronounced for investment vs. labor tax cuts, but my principal argument for low taxes is the Milton Friedman rationale of limited government and putting the federal bureacracy on a long-overdue fiscal diet, an argument McCain made during the 2003 tax cut deliberations and in proposing a spending freeze except for a few programs--Defense, Veteran Benefits, and Social Security.]
Obama: "Tax Cut" = Tax Credit
Obama is deliberately deceptive in his use of the phrase "tax cut", because what he's really talking about are refundable tax credits that go beyond the earned income tax credit (e.g., college tuition, child care, etc.) The earned income tax credit is basically intended to offset regressive effects of payroll tax contributions--which are really mandatory contributions to self-financing entitlement programs, i.e., social security and Medicare. Conservatives such as myself like the earned income tax credit as a preferred alternative to welfare systems where earnings offset benefits on a dollar-for-dollar basis, a more efficient method than minimum wages to affect poverty household income, and a multiplier effect of relevant dollars on the local economy.
One estimate I've seen from the Heritage Foundation is that the Obama tax proposal will add over 10M taxpayers to the no-tax segment of the population--over and beyond payroll taxes. Obama window-dresses some of his proposals so technically some tax breaks aren't simply handouts.
For example, to qualify for the $4K college tuition tax break, the student must provide 100 hours of national/community service of some kind. No wonder Joe the Plumber is upset: According to PayScale.com, the hourly rate for the average American plumber with 20 years of experience is $21.57. Obama is promising low-skilled college-level students $40/hour for the tax credit, several times the minimum wage. We are not talking about a deduction for college tuition or a government loan: we are talking about a full loss of government revenue. I strongly suspect that university financial aid officers will factor that into their rewards, and the tax credit is a disincentive to colleges from holding the line on costs.
On other things, like his bonus 10% mortgage interest tax credit (on top of mortgage interest deductibility), it's difficult to make an argument that it influences consumer behavior, since current homeowners would be eligible; Obama is pushing on a string.
Given an existing budget deficit, it's difficult to see how we can afford this way of "spreading the wealth around", especially since his investment and upper-income tax bracket tax hikes will likely have a dampening effect business and related job growth. Moreover, the dynamic effects of marginal tax increases imply, just as Clinton discovered, a shortfall in expected revenues.
Obama Implying McCain Hypocritical for Criticizing His Tax Credits
The Obama criticisms of McCain's health care proposal have been materially false and misleading. First, Obama has suggested that McCain's proposal for a $5000 tax credit for all households to buy health insurance (including out-of-state carriers) vs. Obama's retained tax-advantaged employer-sponsored health insurance (in conjunction with a federal system open enrollment). Obama in a TV spot still airing claims that "millions" will pay more in taxes under McCain's policy; in fact, Obama misleads people by pretending that tax-advantaged plans do not ALREADY receive an implicit tax subsidy for employer-sponsored health insurance, when it's available. In fact, for the people not enrolled in health insurance through work, McCain extends tax benefits to them to help defray the costs of health insurance. For most employer policies, the tax credit will exceed the existing tax subsidy (the value of which depends on the employee's highest tax bracket). Some employees in higher-costing health plans may find they'll pay taxes on the insurance cost exceeding the taxable basis up to the $5000 credit. In any case, McCain will allow people to shop across states, which may save on expensive features or enrollment conditions (e.g., no waiting period for ill people). Excesses of tax credit over health expenses can be deposited in a health savings account.
I believe the purpose of McCain's using a tax credit was similar to the concept of stressing flat-bid vs. cost-plus contracts. Flat-bid contracts provide an incentive for the vendor to seek cost-savings; in a cost-plus contract, there is no inherent cost discipline since costs are passed along to the customer. The elephant in the room for both Obama and McCain's plans is cost-containment, and both plans have a common problem in avoiding a mandate of coverage. In McCain's case, it's a matter of principle; in Obama's case, it's more complex, e.g., waivers for budgetary reasons, e.g., as is happening in Massachusetts, which is rapidly outstripping cost estimates.
There are some fundamental issues with both approaches; in particular, I see health insurers wanting to offload poor health risks/costs on the government. We see, for example, from the technology field, where design mistakes lead to much more expensive implementation issues, so it's more cost-effective to catch problems early in the process. A number of health risks, e.g., obesity, diabetes, etc., which if not addressed at an earlier stage, can result in catastrophic conditions, including organ failure, blindness, amputation, etc.
I would build on a proposal Bob Dole made on catastrophic health insurance and mandate participation, plus require hospitals to bill a minimum means-tested user fee from the noninsured. The fact is that medical expenses are a leading cause of bankruptcy, and policyholders end up absorbing the costs. Second, I would provide tax/cost/premium incentives for preventive care, verifiability of regular fitness activities, and certification of good health conditions (reasonable weight standards, no smoking, etc.) Third, I would like to see a move from cost-plus pricing to more of patient-based pricing giving doctors an incentive to minimize unnecessary tests and visits, recommend effective generic drugs when applicable, etc. Fourth, I want to like to see open and transparent medical service and prescription drug pricing, third-party ratings services, doctor credentials, etc. Fifth, I want to see standardized/portable patient records and history and industry-standard billing, integrated with cost-containment procedures. Sixth, I think we need to see fundamental malpractice insurance reform, including caps on punitive damages.
Going back to Obama's contention that John McCain's approach to health care is no more than his pandering giveaways on savings accounts, mortgage interest, college tuition, etc., is disingenuous; McCain is simply providing equal protection for people whom do not get health care through work and do not have access to the same implicit federal subsidy via pretax deductions. I would have preferred more of a standard deduction myself; I think McCain was focusing on competition in the marketplace to wring out costs and provide an incentive for taxpayers to choose more efficient carriers.
Furthermore, Obama's argument that McCain's deregulation of the health insurance industry by allowing policyholders to buy policies across states constitutes the alleged "deregulation" problems resulting in current financial tsunami is also intentionally misleading. It's more cost avoidance of state mandated add-on benefits and/or no-wait conditions; for example, auto/life insurers Geico and USAA have a business model which allows policyholders to bypass insurance agent commissions, up to 15% or more of the premium.
The Fundamental Philosphical Difference Between the Parties
There is a Democratic obsession with class differences. The upper-income taxpayers have made out better than lower/middle-class taxpayers; the Democrats have also made an issue of oversized executive compensation. As a shareholder, I do have concerns with undeserved compensation (which impacts my own return), especially for executives whom turn in middling industry-comparable performances, no vision for future growth, etc. But from a taxpayer perspective, they are paying a disproportionate amount of federal taxes because of their higher tax bracket; if you were to parcel out executive pay to "spread the wealth" more in the company, given the lower tax brackets of most company employees, the net result would be lower aggregate federal revenues for the same amount of aggregate income. That may be fairer from Obama's ideal of "spread the wealth around" but if you have thousands of employees, it probably doesn't go that far. Having the right executive with the right vision can grow a company and with it the number of well-paid positions to which one can aspire, not to mention participatory equity stakes; if he or she can increase billions of market value to company equity, I don't mind a healthy compensation package. Baseball slugger Babe Ruth was once asked about his compensation relative to the President, and he famously responded, "I had a better year than he [Hoover] did."
Envy doesn't make for good public policy. It makes no sense, from the perspective of moral hazard, to provide tax credits that, if anything, provide a disincentive to grow one's income if the price is you pay more taxes and lose one's benefits.
Conservatives note that the result of the Bush tax cuts has been for the well-to-do to deploy more capital from, say, tax-advantaged bonds to seek the higher returns of equities. They may increase their returns and hence their reported taxes. If you lower the effective returns by punitive tax increases, that capital may not be made available to help drive future growth in American companies and workers.
The fact is that higher-income taxpayers pay a disproportionate amount of federal revenues, and the end result is it has freed up discretionary income for lower-income Americans. The Democrats could see this as a progressive outcome, but instead take it as a given that playing Robin Hood by increasing the marginal rates on investment income and high income is desirable.
Obama not only wants to play Robin Hood but has made around $800B in domestic spending promises, based on vaguely specified pay-as-you-go, but he has not, as a senator, identified $800B in wasteful spending, and other than some veiled threats to Defense spending, he certainly doesn't want to antagonize groups with a vested interest in the programs he may cut. Not to mention ticking time bombs in social security and Medicare, the existing financial bailout, likely recessionary effects of increasing social spending (e.g., unemployment compensation) and lower income tax revenues. Remember 1992 when Clinton campaigned on a middle-class tax cut and "discovered" (after he was elected) the need for a tax hike? How credible is a freshman senator whom is claiming he's a budget cutter, when he's low-rated as a by watchdog groups (such as Citizens Against Government Waste) and has personally requested nearly a billion in earmarks, voted for the infamous Bridge to Nowhere, and secured a project for the University of Chicago system for which he has taught and his wife is employed? Do you expect him to veto a goodies-laden budget from Pelosi and Reid anymore than Bush stood up to Republican Congress budgets?
In contrast, McCain doesn't promise Obama's budget-busting tax credits and new discretionary domestic spending and talks about freezing federal spending and vetoing earmarks and bloated Congressional spending bills.
The basic difference in the conservative approach is minimizing the necessary government footprint, making necessary government run more efficiently and effectively, and providing the necessary foundation for economic liberty (e.g., educational/training opportunity, minimize/simplify government-related barriers to entry (e.g., paperwork, regulations, and mandates), timely, verifiable information to facilitate consumer, business, and investment transactions).
Obamanomics fails on multiple levels from a conservative standpoint. For example, Obama claims to provide a favorable capital gains policy for small businesses, but qualifications are complex. It taxes nominal vs. real investment income; for example, you could sell an asset at a price which tops the original price but which hasn't kept pace with inflation. It makes a virtue of regulations that serve as artificial barriers of trade across states, e.g., resistance to McCain's idea to allow individuals to purchase health insurance policies across states; it condones letting judges unilaterally write down mortgage loan amounts at the expense of banks which entered into good faith transactions.
It creates moral hazards through tax credits, I mean "tax cuts" to 40 million Americans whom pay no federal income tax; the government will match your savings up to a certain amount, even if you planned to save; the government will give you a tax credit to buy an energy-efficient vehicle, even if $4/gallon gas already convinced you to buy a better mileage car, the auto company doesn't need to cut a high selling price because the government is protecting their profits, and the current demand outstrips the supply; the government will write off the first $4000 of your college tuition costs (well, for a nominal number of make-work hours), which gives colleges that much wiggle room to pass along cost increases or award less generous packages. The government will underwrite some of your child care expenses, which allows child care providers price protection, lessens the incentive for more economical arrangements or for businesses to allow for flexible work schedules, etc. Generally speaking, we are playing a classic liberal game of picking winners and losers in economic or policy matters; this may be politically popular with domestic suppliers or consumers of relevant goods and services, but they constitute a form of economic protectionism which does not facilitate the production of globally competitive goods and services.
Obamanomics also maintains a globally uncompetitive business income upper tax bracket, which discourages domestic investment, and subtly threatens our NAFTA relationship with our energy supplier neighbors Canada and Mexico and threatens hard-negotiated trade treaties with South Korea and Colombia. (There are recent reports that Canada and Colombia are pursuing free trade treaties with the European Union.)
Conclusion
Earlier this decade in the aftermath of 9/11 and the corporate scandals (e.g., Enron and Tyco), we were attempting to fight off a global economy teetering on recession and the Fed Reserve had pushed interest rates close to zero. There was open speculation on Fed Reserve policy options once it ran out of interest to chop; were we going to have to pay banks for holding our money? One important side effect of lowered rates was providing homeowners a way to renegotiate loans and free up discretionary income.
Federal taxes in a certain way now face a similar problem in that a large plurality of working Americans do not earn enough to pay federal income taxes. In fact, the government pays a number of lower-income people to work (i.e., the refundable earned income tax credit). (John McCain has suggested an interesting variation on this concept, e.g., a partial income rebate for out-of-work Americans whom accept a lower-paying position than their prior to work while training for a higher-income career.)
We also maintain an increasingly fragmentary and complex tax system which often requires the services of specialists (e.g., tax accountants) and is constantly obsoleted. For example, consider the gasoline tax. Assuming the constant wear-and-tear on roads, lower sales of gasoline based on lower consumption and/or hybrid/electric engines, we need to provide a fairer way of distributing highway costs (e.g., a tolling system). We must look at simpler (flatter) taxation, perhaps including a consumption tax (applied to goods and services) and an asset tax. Notably McCain has endorsed the idea of a simpler tax system; Obama provided arguments against it when Joe the Plumber raised the idea (it's typical ObamaDoubleSpeak; he pays lip service to the general concept, and then subtly tears it down.) The reason I mention that here is the fact that Obama has been demagoguing the idea that Congressional legislation is written by (allegedly Republican) lobbyists, providing all sorts of fine-print and/or last-minute special-purpose clauses favoring a particular company or industry. A properly designed and administered consumption tax would do away with such labyrinths.
Obama's belief that "it's good to spread the wealth around" is not a capitalist ideal. Starting businesses is a risky endeavor; many, if not most new ventures fail. Furthermore, many graduate students spend low-income years pursuing a PhD, without any guarantee of a faculty position or high-paying business job; similarly, medical students often assume huge loans and high costs in starting up a practice. Scientists and engineers often must progress through a rigorous curriculum. There will always be winners and losers in the capitalist renewal of destructive creation, e.g., the succession of whale oil with petroleum, candles with electric light, telegraph with long distance calls, etc., and/or technological or managerial innovation (e.g., the replacement of telephone operators). A number of people contribute to charities or establish philanthropies with their wealth but don't trust politicians to squander their hard-earned dollars to guarantee a certain standard of living and provide a disincentive for long-term economic self-reliance.
The conservative alternative, which McCain represents, is to spread the opportunity to acquire wealth. This includes providing parents a viable alternative (e.g., vouchers, charter schools) to dead-end, dysfunctional public schools and allowing a lower barrier to entry and operation (including fair competition, low taxes or mandates and minimal business-impeding regulations and reporting requirements) to create and grow one's own business. Obama's impulse to maintain globally uncompetitive business tax brackets, to increase individual high-bracket tax rates, including the likely bundling of no-ceiling social security tax collection with the highest tax brackets, and to increase the complexity of the tax and regulatory system is not favorable for business growth and related higher-paying job opportunities.
