Barack Obama offered a very strange argument for increasing government intervention this past weekend. At a campaign speech in Roanoke, Virginia, Obama pointed out the obvious: no one succeeds entirely on his or her own. Government has a role in building the streets and roads that bring both sellers and buyers to market, in regulating commerce…. “If you were successful, somebody along the line gave you some help,” Obama opined.
Few would dispute that; policy differences exist because voters disagree on how much government should regulate markets, and how many of the resources produced by the economy of a free people should fund government activities. For the most part, those are honest differences based on values and perception of the resources needed. Had Obama simply acknowledged that, the President would have been on firm, if rather mundane, ground.
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Unfortunately, Obama overshot the mark considerably -- in part because of his efforts to sell a tax policy that doesn’t have much chance of success. He explicitly argued that the small business owners who take risks and generate economic output had nothing to do with their own success. “If you’ve got a business,” Obama told the crowd, “you didn’t build that. Somebody else made that happen.”
I suspect that would be news to small business owners, most of whom started off by putting their savings and credit on the line, and who poured their own sweat equity into their success – and failures, too. They certainly had help, both direct and indirect, from a good education, a solid banking system, and from a political form of government that nurtured and encouraged free markets without interfering with their operation or confiscating the capital needed for markets to open and expand. However, when we have good policies in place, those exist as a given, and the difference between job creators and job fillers are risk management, resources, and talent – which small business owners provide more than anyone else does.
Why make that argument? Obama has embraced a soak-the-rich tax policy for the 2012 election cycle, arguing that Congress should extend the current tax rates for middle- and working-class earners, and only for one more year, while raising taxes on households earning over $250,000 a year. The President pitched the same idea last year, hoping to drive a wedge between voters and Republicans – but he split his own party instead. Senator Charles Schumer and Nancy Pelosi balked at the $250,000 cutoff, arguing that New Yorkers (and other dual income earners in big cities) at that income level are indeed middle class. The Senate tried to push a “millionaire tax” instead, which also ended up going nowhere.
Once again, Obama wants to make this an issue of “fairness.” By arguing that it takes a village for anyone to succeed in a market, the President can argue for greater confiscation in tax policy, claiming that it will fuel a new level of success. A new study by Ernst & Young conducted on behalf of the US Chamber of Commerce and the National Federation of independent businesses demolishes that argument – and raises a red flag on Obama’s tax policy for an economy already slipping backward toward recession.
The Congressional Budget Office had already warned that the expiration of the Bush tax rates and the effects of sequestration would push the U.S. into recession in 2013, if we aren’t already in one by the end of the year. This Ernst & Young study focused solely on the impact of raising the tax rates just as Obama proposes, which would increase the rates of the top two tax brackets by 3 percent and 4.6 percent. This would take place in addition to an increase in the Medicare tax, imposed by the Affordable Care Act (ObamaCare), which went from 2.9 percent to 3.8 percent for high-income earners, and in addition to a new tax increase (3.8 percent) on investment income.
As a result, high-income earners face stiff new tax bills. “The top tax rate on ordinary income will rise from 35 percent in 2012 to 40.9 percent, the top tax rate on dividends will rise from 15 percent to 44.7 percent,” the report summary states, “and the top tax rate on capital gains will rise from 15 percent to 24.7 percent.” Needless to say, that will have a dramatic impact on investment and economic performance.
“This report finds that these higher marginal tax rates result in a smaller economy, fewer jobs, less investment, and lower wages. Specifically, this report finds that the higher tax rates will have significant adverse economic effects in the long-run: lowering output, employment, investment, the capital stock, and real after-tax wages when the resulting revenue is used to finance additional government spending.”
How bad will it be? In the long run, Ernst & Young concludes, the tax hikes will cost more than 700,000 jobs and reduce economic output by 1.3 percent if the cuts go to fuel more government spending, using today’s economy as a measure. Wages would fall by 1.8 percent, and investment would decline by 2.4 percent. If the proceeds of the confiscatory policies get used to fund a broader reduction in tax rates below current levels – which is not part of Obama’s proposal – output still falls by 0.4 percent.
This demonstrates the problem with excessive government interventions in markets, which always suppress growth to some degree. That is a rational trade-off, however, for a smoothly operating economy. However, we do not have a smoothly operating economy nor have we had one for the last several years, thanks to a crash created by government manipulation of the lending and securities markets to achieve favored social-policy outcomes, and an economic plan afterward that consisted of short-term gimmicks and escalating ambiguity in tax, regulatory, and monetary policy.
We need to find ways to stimulate growth, not suppress it. Obama’s argument that the village needs to confiscate more from those who invest and take risks to provide that growth is exactly the worst prescription possible for our ailing economy – and yet another demonstration that the President has learned nothing about small business or the economy after four years in office.
