Real tax reform

Tax Cuts, Real and Imaginary
Obama's spending programs in disguise.
by Newt Gingrich & Peter Ferrara
09/15/2008, Volume 014, Issue 01



Thirty years of Republican tax policy have now completely eliminated federal income taxes on the poor and lower middle-income Americans, and almost eliminated them on middle America.

The latest data from the Congressional Budget Office and the Internal Revenue Service show that the lowest 40 percent of income earners as a group actually receive net payments from the federal income tax system. (They get 3.8 percent of total federal income tax revenues instead of paying any income taxes.) The middle 20 percent of income earners pay 4.4 percent of federal income taxes. Thus the bottom 60 percent of income earners together, on net, pay less than 1 percent of all federal income taxes. (These workers earn 26 percent of national income.)

The data show that the top 1 percent of income earners now pay 40 percent of all federal income taxes, which is almost double their share of the national income. The top 10 percent pay 71 percent of federal income taxes, though they earn just 39 percent of the nation's pretax income.

This is a result of the across the board income tax rate cuts adopted by Ronald Reagan and the current President Bush, plus the Earned Income Tax Credit first proposed by Reagan in the 1970s, and the child tax credit enacted into law as part of the 1994 Contract With America.

Barack Obama claims to be proposing income tax cuts for low and moderate income and middle class workers, but Reagan Republicans have already eliminated most of their income tax liability. What Obama is calling tax cuts for the middle class is really a slew of refundable federal income tax credits that would primarily go to those who are paying little or no federal income taxes now. Such credits would primarily not reduce tax liability, but instead be checks from the federal government for child care, education, housing, retirement, health care, even outright giveaways. These are not tax cuts. They are new federal spending programs hidden in the tax code.

When Obama says that he will cut taxes for 95 percent of Americans, he is talking about his proposal for a $500 refundable income tax credit for all but the top 5 percent of income earners. For the bottom 40 percent of income earners, this will be just another check from the federal government rather than a reduction in tax liability. It is another sharp increase in government spending rather than any sort of tax cut. An arbitrary cash grant does not, moreover, do anything to improve the economy or incentivize productive business. That only comes from cutting tax rates. What Obama is proposing here is really quite similar to George McGovern's 1972 plan to send everyone a $1,000 check, which voters rightly saw as a crass vote-buying scheme rather than serious policy.

Obama also proposes to increase the top marginal tax rates for virtually every major federal tax. These increases would not come remotely close to financing the trillion dollars of increased direct federal spending Obama is promising--including a new national health insurance entitlement that would be bigger than any of the massive entitlement programs we already have and already have trouble paying for. Indeed, if the tax rate increases cause a serious enough economic decline, they will lose revenue on net.

Obama's plans are the opposite of tax reform. Instead of closing loopholes and lowering rates, he is creating new loopholes and raising rates.

But there is a real tax agenda that would benefit middle-America.

America has the second-highest corporate tax rate in the industrialized world, with a federal rate of 35 percent--rising to 40 percent on average with income taxes. The average corporate tax rate in the European Union countries is 24 percent. Even India and China have lower corporate tax rates. Ireland adopted a 12.5 percent corporate tax rate 20 years ago. Since then per capita income has soared from the second-lowest in the EU to the second-highest.

John McCain is proposing to reduce our federal corporate tax rate to 25 percent. The top income tax rates borne by noncorporate small businesses and investors should be reduced to 25 percent as well. Obama is taking the opposite tack, calling for increases in the income tax rates that small businesses pay and additional tax increases for larger corporations (such as the so-called windfall profits tax on oil companies that would only further hurt the American economy with higher energy costs).

With two-thirds of the American people now owning stocks, capital gains taxes are another middle America issue. Obama proposes to increase the top capital gains tax rate by 33 percent, which will cause a decline in the value of stocks held by middle-income families. History has also proven, time and again, that rising capital gains tax rates cost the federal government money. From 1968 to 1975, the capital gains tax rate was raised four times, and capital gains tax revenue fell by more than 50 percent. When capital gains tax rates were raised by 40 percent as part of the compromise in the 1986 tax reform act, revenues fell by 40 percent the next year, and by 1991 they had fallen by 63 percent.

McCain is proposing to retain the current capital gains rate of 15 percent. But to maximize economic growth for working people and middle-income families, the capital gains tax rate should be zero. The capital gains tax is just another layer of taxation on capital income. It taxes the present discounted value of future income that will be taxed again--multiple times, in fact--when it is earned. That is not fairness or good economic sense. Many of our international competitors maintain a zero tax rate on capital gains--including 14 out of 30 OECD countries, China, Taiwan, Hong Kong, and Singapore. Eliminating the capital gains tax would cause the stocks held by two-thirds of the American people to soar in value.

The most important middle-income tax issue, however, is payroll taxes--the taxes withheld by your employer to pay for programs like Social Security and Medicare. The federal payroll tax is now the largest tax most workers pay. With federal income taxes already abolished for the poor and lower middle-income workers, and almost abolished for middle-income workers, the next big tax cut for these working people would be the ability to utilize personal accounts for Social Security.

Over time, personal accounts could expand to replace the entire payroll tax and finance the same benefits. Instead of paying a tax, working people would be saving and investing in their own personal family wealth engine. With fully expanded accounts, average families could expect to accumulate a million dollars or more, even while paying in about 25 percent less than the current 15.3 percent payroll tax. Such accounts are estimated to pay at least twice what Social Security currently promises and provide the only real hope of addressing the long-term funding problems of Medicare without harming retirees.

This would be nothing less than a revolution in the personal prosperity of working people. McCain at least favors starting such personal accounts. But, as is so typical of Barack Obama, he would just slam the door on a truly revolutionary change, and hark back to the stale ideas of the 1960s or even the 1930s. Obama's tax policies would take America in exactly the opposite direction of the tax reform and threaten economic disaster in already difficult times.

Well Aaron do you agree that the gap between rich and poor is growing in this country?

If so, do you believe it is a legitimate interest of gvt. to help level the playing field?

If you don't believe that is a legitimate interest, then the Gingrich plan might look pretty good, since it would result in more for the rich and less for the working class.

Therefore making the income gap even greater.

And moving more toward two Americas.

No, S I don't agree the gap is growing. I believe it's always been there (you might be interested in knowing it grew more between 1988 to 98 then it did from 98 to 2008), and always will be in one form or another. It’s a simple fact of life and any outside attempt at income redistribution does nothing but make matters worse.

Here is an interesting article about why income distribution (socialism) doesn't work.

And as there is NOTHING in the constitution that grants government that power to level the playing field, no I don't believe they have a legitimate interest in doing so.

We live in a country of tremendous opportunities and if one is poor, they can get out. There is a huge demand for nurses, truck drivers, coal miners and many other skilled labor jobs and at the rate the government pays for education, there is no reason for anyone to remain poor.

At least that's how I see it.

You have the right to keep the fruits of your labor. You also have the right to donate to charities you support. If you have enough earnings and/or savings to adequately support yourself and your family and have surplus you'd like to share, nothing is stopping you from donating that surplus to any cause of your choosing. You can donate cash and/or supplies and/or labor for just about anything you can think of. You could just help out a family member or friend or neighbor going through a hard time. The government isn't entitled to take your money and give it to who they choose. It's your money. You earned it.

"It's your money. You earned it."

Well that argument sounds good on its face Stephanie.

But Aaron's post does not primarily deal with personal "earned income" as your post implies.

It deals in large measure with unearned corporate and personal income.

Corporations are creatures of the government, and as such are inherently subject to gvt. regulation. Just my opinion no offense intended.

I'm curious S, how is corporate income 'unearned'?

I suppose you're referring to investment income? Why should people who've been successful entrepeneurs, or savers have to pay taxes on income earned on their investments?

If my parents, after working all of their lives to have something for themselves and their children and grandchildren, are actually able to leave us a little something, why should the government be able to take any portion of it and give it to someobdy else? My father has painted houses for the past 50 years by day, spending countless nights and weekends singing in nightclubs and at weddings. What right does the government have to take what little income a lifetime of savings generates for him? What right does the government have to take it from my brothers and I if he and my mother have $100 or $100 million when they die?

Willie Nelson has spent a lifetime on a tour bus to play guitar and sing for his fans. Why should a nickel of his money be taken from the government to pay for anything for anyone else. It's his money. I didn't earn it. You didn't earn it and neither has anyone else but Willie Nelson and nobody else is entitled to spend his money to pay for their expenses.

Well Stephanie again you get on your hi-horse and either don't read the post or ignore it.

Corporations are set up primarily to dodge personal liability.

It sounds like your father was working as an individual and my statement would not apply to him.

I am not opposed to people working and keeping what they earn.

One of my political heroes (and one you seem to hold in low esteem) was Abraham Lincoln.

He said "to secure to each person the whole product of his labor, as nearly as possible, is a worthy subject of any good government."

But the things I referred to above do not refer to the product of the individual's labor.

They refer to "unearned income"
by corporations and individuals.

Heck I have worked all my life and would like to keep the product of my own labor like anyone else.

I'm curious S how corporations income is unearned. I work for a fairly large corporation and I don't see the income as unearned. I see a great many individuals, in exchange for their labor, working hard to ensure a successful working environment that provides the capital needed to sustain the business and the profitability needed to attract investors for continued growth and additional employment opportunities.

Can you please explain to me how their combined income is unearned?

sodbuster wrote:Well Stephanie again you get on your hi-horse and either don't read the post or ignore it.

Corporations are set up primarily to dodge personal liability.

It sounds like your father was working as an individual and my statement would not apply to him.

I am not opposed to people working and keeping what they earn.

One of my political heroes (and one you seem to hold in low esteem) was Abraham Lincoln.

He said "to secure to each person the whole product of his labor, as nearly as possible, is a worthy subject of any good government."

But the things I referred to above do not refer to the product of the individual's labor.

They refer to "unearned income"
by corporations and individuals.

Heck I have worked all my life and would like to keep the product of my own labor like anyone else.

I'm not the one on a high horse. That would be you. I did respond to part of your post, if you'd like I'd be happy to respond to the rest.

"It's your money. You earned it."

Well that argument sounds good on its face Stephanie.

But Aaron's post does not primarily deal with personal "earned income" as your post implies.

It deals in large measure with unearned corporate and personal income.

Corporations are creatures of the government, and as such are inherently subject to gvt. regulation. Just my opinion no offense intended.

When you mentioned unearned personal income surely you were referring to interest, dividends, and wealth handed down from one generation to the next. I was speaking to that component of your previous post.

As far as corporations go......why not discuss Microsoft. Bill Gates has amassed an incredible fortune in an extremely short period of time. His ingenuity, his work, and his investments have created one of the most profitable companies in the world. He has created countless jobs and products that vastless improve the lives of people across the globe.

Yet for you and other socialists that isn't good enough. Bill Gates isn't entitled to keep the fruits of his labor. He shouldn't be able to take all the wealth his ideas and his company earns and invest it and earn money off those investments. He shouldn't be able to spend his money as he sees fit. Gates is a very generous man who donates a large portion of the earnings the government isn't stealing from him to pay to rebuild public housing in New Orleans and for foodstamps and medical benefits for my 350lb neighbor who had the audacity to bitch that her daughter didn't qualify for a school clothes allowance this year because of the SSI check the daughter now receives the day after she had Direct TV installed.

When Bill Gates dies you surely want the government to take a tidy slice of whatever he has to bequeath to his loved ones, even though he's paid taxes on everything he has earned already and has been very generous to causes he has found worthy over the years. The government needs to make sure it can pay for foodstamps and heating assistance and clothing vouchers and toys at Christmas for the grandchildren and great-grandchildren who will grow up to expect and demand that the government take care of all of their needs, including the paying the burial expenses of the matriarch of the family who has never, and will never contribute anything to society other than a few more "citizens" to feed, clothe, educate, medicate and bury.

If corporate income taxes weren't among the world's highest in the United States maybe there would be less incentive to move production overseas. When Obama kicks about "sending jobs overseas" isn't that what he really means?

Well I am surprised you guys do not realize what unearned income is.

Assuming you file income tax returns.

And it certainly has nothing to do with "keeping the fruits of your labor".

It has to do with profiting from the fruits of other people's labor.

"Yet for you and other socialists that isn't good enough. Bill Gates isn't entitled to keep the fruits of his labor. "

Well Steph it is your forum so you can call names if you want.

But the income from microsoft is not the same as income from Bill Gates' labor.

Corporations are formed to dodge personal liability while allowing personal profit.

So some people (including me) think their tax liability should be higher since they are given a free ride on personal liability.

But regardless if you agree with that, the profits of microsoft are not just the "fruits of Gates' labor".

They are the fruits of their employees' labor, minus the costs involved in production.

If they want to make the "fruits of their labor" argument, then they should operate as individuals and accept liability for their actions like the other individuals do.

ohio county wrote:If corporate income taxes weren't among the world's highest in the United States maybe there would be less incentive to move production overseas. When Obama kicks about "sending jobs overseas" isn't that what he really means?

Well OC that appears to make sense on its face.

But I suspect the profitibility formula includes many other variables besides just the corporate income tax.

i.e. tariffs, quotas, gvt. subsidies, etc, etc.

sodbuster wrote:"Yet for you and other socialists that isn't good enough. Bill Gates isn't entitled to keep the fruits of his labor. "

Well Steph it is your forum so you can call names if you want.

But the income from microsoft is not the same as income from Bill Gates' labor.

Corporations are formed to dodge personal liability while allowing personal profit.

So some people (including me) think their tax liability should be higher since they are given a free ride on personal liability.

But regardless if you agree with that, the profits of microsoft are not just the "fruits of Gates' labor".

They are the fruits of their employees' labor, minus the costs involved in production.

If they want to make the "fruits of their labor" argument, then they should operate as individuals and accept liability for their actions like the other individuals do.

Nobody is falling for that. I'm not calling you a name. I'm correctly identifying your political ideology. Redistribution of wealth and government control are the bedrocks of socialism. You favor government control of everything from banking to education to healthcare to pensions. I can't recall you ever discussing an entitlement you don't favor. What you want is socialism.

This is not a socialist nation and I, and the majority of my fellow Americans, do not want to live in a socialist society. I will fight socialism in the USA, and anyone who promotes socialism in my country, with every fiber of my being.

There no such thing as "unearned" income. If you or a corporation have money and invest it even in a bank, the interest is earned. If you invest your money in stocks the dividend and any profit from selling is earned. All income corporate or otherwise is "earned". What right does the fed, state, or local governments have to seize upon income solely because they believe an individaul or corporation has too much? They have none.

Now, the reason so many jobs have been shipped over seas has to do with the following; 1.) a tax code that is overwhelmingly complicated and expensive, 2.) over regulation by beauracrats and votebuying politicians, 3.) the lose of the work ethic in America, 4.) a suit happy populus.

Cato

I figure that Jesse James and Clyde Barrow believed that their income was "earned", too.

This is not a socialist nation and I, and the majority of my fellow Americans, do not want to live in a socialist society.

I disagree. The majority of Americans are quite happy with our home grown socialist programs. Sometimes they prefer to call it something other than socialism. But most are not against some degree of wealth redistribution. For example, how many Americans want to see Social Security and Medicare disappear?

What right does the fed, state, or local governments have to seize upon income solely because they believe an individaul or corporation has too much? They have none.

OK. So then if the government has no business taxing and regulating corporations, then why should government sanctions corporations at all? Corporations are artificial persons created by public law. Why should government even be in the business of creating artificial entities called corporations- which have stronger rights with less legal responsibility for their actions than real people do?

http://www.investorwords.com/5141/unearned_income.html

Definition: (unearned income)

"An individual's income derived from sources other than employment, such as interest and dividends from investments, or income from rental property. also called unearned revenue. opposite of earned income."

ziggy wrote:

This is not a socialist nation and I, and the majority of my fellow Americans, do not want to live in a socialist society.

I disagree. The majority of Americans are quite happy with our home grown socialist programs. Sometimes they prefer to call it something other than socialism. But most are not against some degree of wealth redistribution. For example, how many Americans want to see Social Security and Medicare disappear?

How many Americans are totally dependent upon SS & Medicare to get them through their senior years? Our government has fostered this dependency. Social Security recipients pay into the fund. How many of the swarming masses huddled in substandard public housing in urban areas of this nation have contributed to anything other than the gene pool and the national debt?

ziggy wrote:

What right does the fed, state, or local governments have to seize upon income solely because they believe an individaul or corporation has too much? They have none.

OK. So then if the government has no business taxing and regulating corporations, then why should government sanctions corporations at all? Corporations are artificial persons created by public law. Why should government even be in the business of creating artificial entities called corporations- which have stronger rights with less legal responsibility for their actions than real people do?

Perhaps you can explain what you mean because from my corporate responsibilities mandated by government, laws, rules and regulations, I just don't see it that way. The consequences range from individual and company fines and penalities up to jail time for habitual and negiliant violating offenders. And for that right, the money generated by corporations is double taxed by the same government that regulates corporations.

Perhaps you can explain what you mean because from my corporate responsibilities mandated by government, laws, rules and regulations, I just don't see it that way. The consequences range from individual and company fines and penalities up to jail time for habitual and negiliant violating offenders.

How many real people have been jailed for possession of a few ounces of marijuana or for a bit over the limit of alcohol in their blood while driving a car?

How many corportate executives have been jailed for their company exceeding by tons and hundreds of tons and thousands of tons the amounts of their effluents allowed into the air and water?

And for that right, the money generated by corporations is double taxed by the same government that regulates corporations.

Kind of like the grunt working on the line that is taxed when he earns it, again when he spends it, and over and over again as long as he owns a car or house or other property he purchased with after tax dollars?

The corporations get to write off the entire cost of doing business- rent, utilities, labor, fuel, equipment, insurance, entertainment- just to name a few. But the worker whose labor actually generates the corporate wealth, the corporate profit, what does he or she get to write off? Less than $9,000 annually.

"Double taxed" indeed. The individual worker is taxed endlessly- and with almost no "cost of doing business" (cost of living) deduction.

The answer isn't to increase corporate taxes. The answer is to reduce the size of government. Increasing taxes and spending will only create more people unwilling, or worse yet, incapable of caring for themselves and their families. Too frequently government dependency passes from one generation to the next. We need to wean them, not start providing beef to go with their potatoes.

So we are in agreement. The GOVERNMENT is negligent in their oversight responsibilities and they tax the Americans far too much.

Now how many of those poor grunt workers would have the money to pay for all of those taxes were it not for the capital investments of corporations that provide them their jobs?