The Democrats resent their recent losses and propose to take their anger out on American taxpayers — with a massive tax hike presented as a compromise on extending the Bush tax rates. It may be bad news for taxpayers, investors, the jobless, and the economy at large, but the Democrats’ intransigent insistence on sticking to their class-warfare platform is excellent news for incoming Republicans, inasmuch as it suggests that the Democrats still have not figured out exactly why the nation visited an almighty shellacking upon them on Election Day.
Many congressional Democrats first wanted to undo what they still insist on calling “the Bush tax cuts,” by which they mean raising the tax rates that have been the law of the land for nearly a decade now. That was, at one time, Plan A. Reality got in the way, including the reality that first John Kerry and then Barack Obama campaigned on a pledge not to raise middle-class taxes. Obama raised them, anyway, but he did it through the back door in the health-care bill. Still, an explicit tax-rate hike for the middle class was off the table, and so Plan B was a large tax hike on families earning $250,000 or more. But that would have punished a lot of small businesses, not to mention a fair number of two-earner households consisting of the likes of policemen, nurses, public-school administrators, and other professionals whose combined household incomes frequently top $250,000 but who can hardly be demonized as “the rich.” So now Sen. Claire McCaskill, a Missouri Democrat, has trotted out Plan C: confining rate hikes to “millionaires,” meaning any household with an income exceeding $1 million. Senator McCaskill has never been the sharpest financial mind in the Senate, but even she should be able to figure out that a married couple earning $1 million in 2010 does not necessarily consist of “millionaires” — depending on their state and local tax burdens, they’re likely to be barely halfway there even before they have spent one thin dime of their own earnings. Nor does the gentlelady from Missouri much seem to appreciate the fact that a large number of small-business owners have an income exceeding $1 million — precisely once in their lives, usually the year they sell their businesses and retire. They are not that rich, either. Economic reality is complex, but the Democrats are still borrowing their rhetorical gambits from the 1930s Monopoly game board, promising to stick it to Rich Uncle Pennybags with his monocle and top hat — Parker Bros. economics.
The economic facts are a good deal more complicated. As the always-sensible Reihan Salam reports in the current edition of National Review, economists expect that raising taxes at the top end would reduce economic growth significantly. Democrats will call that a Republican talking point, but it is consistent with the findings of the nonpartisan Congressional Budget Office, currently under the management of Douglas Elmendorf, a Democratic appointee. The CBO numbers suggest that a partial preservation of the Bush tax rates — meaning a compromise that raises taxes on “the rich,” in this instance defined as those earning $250,000 or more — would reduce real GNP by 1.2 percent, as lower revenue necessitates more government borrowing, slowing down long-term economic growth. But an across-the-board extension would reduce real GNP by only 0.6 percent, cutting the economic losses in half. Another way of saying that is that the growth effects of extending the tax cuts at the affluent end of the scale would make up half of the forgone real GNP associated with the tax cuts. That isn’t Arthur Laffer’s analysis, it’s the Democratic-led CBO’s.
Confining the rate hikes to households earning $1 million or more very likely would produce an even worse ratio of economic damage to tax revenue raised.
That the growth effects of the lower tax rates should be concentrated on the higher-earning end of the spectrum ought to be no surprise. We’ve been subjected to an endless deluge of ill-considered ranting from Paul Krugman, Robert Reich, and the like about the need to jump-start consumer spending, and the Democrats bemoan the fact that wealthier Americans are more likely to save or — heavens! — to invest their money than to run out and spend it immediately. But real savings are the only viable source of investment capital, and it is investment that creates new products, nurtures new lines of business, and create the new enterprises that produce the jobs unemployed Americans so desperately need. As Rush Limbaugh often observes, you don’t usually get a job from a poor guy. This isn’t trickle-down economics, it’s economics, period, and in more literate times it used to be called capital formation. It’s business, not that the fact would be obvious to President Obama or to Senator McCaskill, who has held elected office more or less constantly since being elected homecoming queen.
While much has been made of the trivially true fact that only 3 percent of small-business operators earn more than $200,000 a year, that is misleading in that the figure includes thousands of tiny part-time operations with no employees — the archetypal case being people selling crafts on eBay. But as our Kevin Hassett reports, about half of all small-business income goes to operators earning more than $200,000 a year. And a great number of investors, including those who provide capital to small businesses (and to larger businesses, too), would find their resources diminished by a rate hike, and would have less money to invest as a result. Given the state of our banks, which are not presently inclined to do a lot of lending, individual investors will play a critical role in rebuilding our recession-ravaged economy and helping to reduce unemployment.
As November 2 should have made clear, Americans are not particularly keen on a big tax hike just now — not for the poor, not for the middle class, and not for the rich, who include a lot of employers and business owners. If the CBO is correct, then there probably will be revenue forgone by extending the Bush tax rates, but the wholesome fact is that the American people and the new Republican majority in the House are in a mood to cut spending. Thankfully, the chairmen of President Obama’s deficit commission have shown a good deal more sense than the tax-happy Democrats in Congress, and their list of spending cuts would be an excellent place to get started reducing the size, scope, expense, and arrogance of the federal government. The president’s panel has also offered some good proposals for simplifying the tax code and lowering income-tax rates. If the remains of the Pelosi-Reid Democrats really want to make a tax-hike campaign — in the face of contrary proposals from the heads of a bipartisan commission appointed by President Obama — their hill to die on, Republicans should be able to best them on both the politics and the policy.