From Today's WSJ:
So the 2013 tax cliff is a big enough economic problem that President
Obama now wants to postpone it for some taxpayers. But it isn't so big
that he's willing to curb his desire to raise taxes on tens of thousands
of job-creating businesses.
That's the essence of Mr. Obama's announcement Monday that he wants
Congress to extend current tax rates for a year, but only for those
making less than $200,000 a year. This is a political gambit designed to
protect Democrats who are starting to feel queasy about opposing GOP
plans to extend all of the Bush rates as the economy weakens
again. The ploy could help Democrats if Republicans fall for it, but it
won't reduce the economic damage to the country.
By Mr. Obama's economic logic, tax increases matter on middle-income
earners but are irrelevant to everyone else. "By the way, these tax cuts
for the wealthiest Americans are also the tax cuts that are least
likely to promote growth," as he put it Monday.
But Mr. Obama is demanding tax increases, not tax cuts, and
large increases at that. If the Bush tax rates expire as scheduled on
December 31, rates on the top two income brackets will jump to 39.6%
from 35%, and 36% from 33%. Add the scheduled return of income phaseouts
for exemptions and deductions, and the rates go up another
two-percentage points—to at least 41% and 35%.
Mr. Obama claims this will merely return rates to what "we were
paying under Bill Clinton," but that's not true either. It ignores his
ObamaCare tax increase of 0.9% on top of the current 2.9% Medicare tax,
plus a new 2.9% surcharge on investment income, including interest
That's an additional 3.8% surcharge on investment income, and added
to the Bush expirations would take the capital gains rate to 23.8% from
15% today, and the dividend tax rate to about 45% from 15%. In Mr.
Obama's economic world, tax cuts for middle-class "consumption" are
good, but low rates to spur saving and investment are bad. This makes no
sense because consumption is ultimately the product of saving and
Congress's Joint Tax Committee—not a
conservative outfit—estimates that in 2013 about 940,000 taxpayers will
have enough business income to meet Mr. Obama's tax increase threshold.
And of the roughly $1.3 trillion in net business income, about 53% will
get hit with the higher tax rates.
This is because millions of businesses report their income as sole
proprietors and subchapter S corporations that file under the individual
tax code. So Mr. Obama wants these businesses to pay higher tax rates
than the giant likes of General Electric or J.P. Morgan. Does that
qualify as "tax fairness"?
As for the impact on growth, even Keynesian theory holds that raising
taxes should be avoided in a weak economy. That's the argument that Mr.
Obama used in late 2010 when he agreed with Republicans to extend the
Bush rates through the end of 2012.
His assumption then was that the economy would be stronger now, but
today we are in the third slow-growth patch in three years. Businesses
are sitting on their wallets as they wait out the tax, regulatory and
election uncertainty. Mr. Obama's tax gambit will only increase that
uncertainty and further retard investment and job creation.
We also know from experience that high earners are most able to move
their money to avoid high tax rates. If they don't have tax shelters at
home, they can find opportunities abroad. Mr. Obama is running ads
accusing Mitt Romney of sending jobs offshore, but the best way to send
capital and jobs overseas is to raise U.S. tax rates to levels that
aren't competitive with the rest of the world.
Mr. Obama tacitly admits this when he talks about corporate tax
reform, but raising tax rates merely increases the incentive for
Congress to create more tax shelters. Mr. Obama promised Monday that if
Republicans accept his proposal now, they can all come together on tax
reform next year. But he knows that if tax rates rise, the Beltway's
revenue "scoring" conventions will make it that much harder to cut rates
again as part of tax reform. In any event, he showed the value of his
promises during his 2011 backroom budget charade with Speaker John
The good news Monday is that
Republicans in Congress and Mr. Romney seemed disinclined to take this
class-war bait. Perhaps they realize that if they agree to raise some
taxes but not others, they'll dispirit their own base and hurt the
economy. They can also put Senate Democrats on the spot by forcing them
to choose between extending rates for everyone and accepting Mr.
Obama's tax increase. Republicans can win this debate by stressing
growth over fairness and jobs over income redistribution.