Monday, October 27, 2008

Obama vs. McCain: Whose Economic Plan is Best?

Currently the United States is undergoing one of the worst financial crises of the last hundred years. Since the crisis is occurring in the middle of a presidential election, it is undoubtedly helping the opposition party challenger, Barack Obama. Obama and McCain have both presented strikingly different plans for recovering from the crisis.

Obama’s plan is centered on a middle class tax cut with increased taxes for taxpayers earning more than $250,000 for couples or $200,000 for individuals (according to Americans for Tax Reform). This plan is the wrong prescription for the economy and is likely to make the problem worse.

In fact, Obama’s income tax hikes are only the starting point for his tax increases. He would increase the capital gains tax by 13%, which could affect people who own stocks in their 401(k) plans or who sell their homes. Obama would also increase the dividend tax on stocks, which also affect 401(k) owners. While McCain would phase out the Alternative Minimum Tax (AMT), which snares increasing numbers of middle class taxpayers, Obama would leave it intact. Obama would also reinstate the Death Tax, which under current law will be reduced to zero by 2010 and then jump to 55% in 2011. Obama also supports increasing Social Security taxes on higher income taxpayers. Obama would also leave the US corporate tax rate at 35%. This is one of the highest corporate tax rates in the world; only Japan and Germany are higher. Additionally, Obama has also proposed a cap-and-trade tax system on carbon emissions and a windfall profits tax on oil companies. Both would lead to higher energy prices for consumers.

While Obama does propose cuts for the middle class (many in the Democratic congress do not agree with this aspect of his plan), his tax increases would affect the segment of the population that drives the economy. The top 5% of taxpayers includes many small business owners. Over half of the nation’s workforce is employed by small businesses. If these companies have to pay more in taxes, they will have less money to pay employees. That will translate into fewer jobs. Additionally, the top 5% of taxpayers already pay 60% of all taxes. This figure is up from 56% before Bush’s tax cuts.

History shows us that low tax rates typically lead to economic growth. In the United States, there have been four cuts in tax rates over the past one hundred years. These cuts took places during the administrations of Coolidge and Harding, Kennedy, Reagan, and George W. Bush. In each case, the economy grew, jobs were created, and tax revenues actually increased. This can also be seen around the world. When Ireland cut its corporate tax rate to 15%, it became one of the fastest growing economies in Europe. Eastern European nations such as Russia, Slovakia, Serbia, Ukraine, Romania, and Georgia have all used low flat taxes to stimulate their economies.

On the contrary, increasing taxes slows the economy and actually leads to a smaller Gross Domestic Product and fewer tax revenues. FDR’s tax increases and regulation in the 1930s made the Great Depression in the US last much longer than in many other countries. In 1920, a severe depression had lasted only a year due to President Harding’s cuts to federal taxes and spending. George W. Bush got similar results with tax cuts in 2001.

A more recent example of the folly of tax increases can be found in the state of Michigan. In 2007, Governor Jennifer Granholm enacted the state’s largest tax increase in generation in order to make up a budget shortfall. The taxes were planned to generate about $1.3 billion in new revenues. Instead, tax receipts are far below projections and Michigan entered a statewide recession two years before the rest of the country.

The other side of the coin is that Barack Obama has proposed numerous new spending programs. These costly programs include massive expenditures on healthcare, the environment, a national service plan, college tuition assistance, and many other programs. The total for Obama’s new spending is close to $300 billion per year according to the National Taxpayers Union. Such massive new spending programs would rapidly expand the deficit and increase the federal debt.

Obama and the Democrats are also unlikely to make serious reforms to the nation’s mortgage markets. Many of the problems that we face today can be traced to the Community Reinvestment Act of the Carter era, which required banks to loan money to low-income borrowers. The program was expanded under President Clinton, who directed Fannie Mae and Freddie Mac to increase their holdings of subprime loans.

Fannie Mae and Freddie Mac made large campaign contributions to congressional Democrats in exchange for thwarting Republican attempts at oversight. The two top recipients were Senator Chris Dodd, now chairman of the senate committee that oversees banks, and Barack Obama, who received more money in four years than most members received in twenty. Franklin Raines and Jim Johnson, former CEOs of Fannie Mae and Freddie Mac, have worked extensively on Obama’s campaign.

In contrast, John McCain plans to repeal the Alternative Minimum Tax and reduce corporate tax rates. McCain wants to simplify the tax code so that both individuals and companies will save on accounting costs. John McCain also cosponsored legislation to increase oversight of Fannie Mae and Freddie Mac in 2005.

McCain also has a long record of opposing government waste and pork barrel spending. This makes him an ideal candidate to tackle the growing problems of Social Security and Medicare. Medicare is projected to be bankrupt by 2019 and Social Security by 2050. Changes must be made immediately to avoid massive new taxes or draconian benefit cuts to save both programs later.

Barack Obama’s economic policies take the United States in precisely the wrong direction. His numerous tax increases and expensive new spending programs have been proven to restrict economic growth in the past. To further restrict economic growth when the country is already in a recession would almost certainly prolong and deepen our current economic crisis.


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