Soon after the primaries ended the core issue of the 2008 presidential election shifted from Iraq to the economy. But today’s debate over economic policy does not highlight unemployment and job creation, traditional issues that had dominated campaigns in the forty years following the Great Depression. Nor does it focus on the politics of the “misery index” — unemployment plus inflation — as identified by Jimmy Carter in the 1976 election. Rather, the core economic issue at the close of the 2008 election is taxation.
Tax policy has taken center stage in elections before. In 1980 candidate Ronald Reagan argued for a 33 percent reduction in all individual income-tax rates, mirroring the 22 percent supply-side tax-rate reduction of Kennedy/Johnson in 1964. Carter stood opposed. Four years later Reagan defended his tax-rate reductions while Walter Mondale announced at his nominating convention that he “would” raise your taxes.
This year Obama is repeating the 1992 strategy of Bill Clinton. He is promising middle-class tax cuts — $500 per working adult — along with tax increases for a minority of higher-income citizens.
The Republican critique of the first half of the Obama tax plan is that the $500 tax rebate will go mostly to those who pay no income taxes. In essence, it’s a $500 welfare check, or half the $1,000 payment George McGovern promised to every citizen in 1972. Welfare spending, Republicans argue, is not a tax cut.
The critique of the second half of the plan is that Obama’s tax increases will negatively affect a lot more than the top 2 percent of income earners. For starters, they will take a big bite out of America’s household retirement savings.
When Reagan was elected president in 1980 only 20 percent of adults owned stock directly. Today more than 50 percent of households own stock through their 401(k)s, mutual funds, and IRAs. The tax implications of this demographic shift are significant. In 2003, the capital-gains tax rate was reduced from 20 percent to 15 percent and the tax rate on dividends was lowered from 35 percent to 15 percent. In the two years that followed, the Dow Jones rose from 8,000 to 10,400, directly increasing the value of all those 401(k)s. But Obama, along with the Democratic Congress, is poised to allow the 2003 tax cuts on dividends and capital gains to expire, thus risking a reduction in the value of all those 401(k)s. (The recent stock market collapse has Americans all that more focused on the size of their retirement accounts.)
Meanwhile, Joe the Plumber has focused attention on Obama’s plans to raise taxes on individuals earning more than $250,000 a year. This is no mere tax on the rich since many small businesses pay taxes at the individual rate. Obama’s camp says they will target only 2 percent of small businesses in a given year. Economists point out, however, that of the $700 billion in small-business earnings this year, $420 billion — or 60 percent — was generated by businesses earning more than $250,000. That’s a whole lot more than 2 percent.
Obama’s taxes also have a way of adding up. He has called for raising the top marginal tax rate on individuals and small businesses from 35 percent to 39.6 percent. Added to that will be a tax of 12.4 percent on Social Security, which is now capped at $102,000. This will create a top tax rate of 54.9 percent. (Self-employment profits also will face a 2.9 percent Medicare tax.) Adding in the average state income-tax rate, Obama’s top tax rate on small businesses and individuals climbs to about 60 percent. Compare that with Russia’s top tax rate of 13 percent, Hong Kong’s of 15 percent, France’s of 49.8 percent, and Sweden’s of 56.5 percent.
But Joe the Plumber stands for much more than the economics of small-business job creation and capital formation. He represents our aspirations. Joe doesn’t earn $250,000 a year. This is what he hopes to earn. In this light, Obama’s glass ceiling on small-business earnings looks a lot like George McGovern’s suggestion in 1972 that all earnings over $500,000 be taxed at 100 percent. That plan gained unexpected opposition from blue-collar workers who, when asked if they earned anything like $500,000, replied, “No, but I might someday.”
Of course, Obama is going to take more of Joe the Plumber’s future earnings not to pay for roads and the military, but to redistribute to others.
The economists writing Obama’s tax plan look at one set of numbers and think they’re scaring only a few high-income voters. In truth, the Obama tax plan should frighten the half of American households that have their lifetime savings in the stock market and the 25 million small-business owners who do not earn $250,000 today, but hope to in the future. As Langston Hughes wrote, a dream can dry up like a “raisin in the sun.” A whole lot of dreams are poised to dry up if the vote goes Obama’s way on Tuesday.
– Grover Norquist is president of Americans for Tax Reform and author of Leave Us Alone — Getting the Government’s Hands Off Our Money, Our Guns, Our Lives.