Wow! It looks like the presidential campaign is going to put us right in the middle of a big, fat debate on tax policy.
Good. It’s about time.
While the Bush administration on several occasions pushed through various tax cuts — and refused to raise them — the Bush administration appears to have been guided by an “any tax cut is a good tax cut” philosophy.
And so the administration seems to have chosen the tax cut of least resistance or, in some cases, most support — or both — in pushing its tax-cut agenda.
But not all tax cuts are created equal.
- Some tax cuts spur work, investment and economic growth, while others do little for the economy and just reward various supplicants;
- Some tax cuts make the tax code simpler and more transparent, while others make it more complex;
- And some tax cuts actually increase federal revenues, while others reduce revenues.
The details matter, especially since both candidates claim to be tax cutters.
But so far, it appears that the candidates have two fundamentally different approaches to tax policy—albeit using the language of tax cuts.
Senator Barack Obama says he’ll cut taxes on what he calls the middle class—though he’s had trouble thus far explaining exactly who the middle class is. But Senator Obama also says he’ll increase taxes on small business owners, higher-income workers and investment.
Two of Obama’s tax increases in particular are increasing the Social Security payroll tax on workers making more than $250,000 (the 2.9 percent Medicare payroll tax is already applied to all income) and an increase in the capital gains tax.
These are terrible ideas. Obama’s payroll-tax hike plan won’t solve Social Security’s financial problems, since the money will go into general revenues (like all Social Security payroll taxes do), and not be dedicated to the solvency of the system. And increasing the capital gains tax would be the worst possible move.
And it’s not even like the evidence is hidden under a rock. Cutting the capital gains rate has always increased government revenues—always.
Senator McCain, on the other hand, says he’ll lower the corporate income tax. This would no doubt help U.S. companies compete with their lower-taxed international competitors, since the U.S. has one of the highest corporate tax rates in the industrialized world.
The class warfare rhetoric of raising taxes on the wealthy and lowering them on the middle class always has appeal to a certain segment of the electorate. And it doesn’t exactly represent change, does it?
But we think if the presidential campaign gives us an opportunity for an extended and open debate on tax reform, and the abundant evidence from here and abroad is put on the table, the winner will be a big, fat pro-growth tax reform plan.