I hear disquieting rumors that Obama is not just saying he wants to revisit NAFTA in order to pick up a few votes--apparently he is really serious about this. Nor is his support for letting employees bully their coworkers into joining unions exactly putting a spring in my step and a song in my heart.Obama calls for more tax benefits to individuals but more taxes on high-income earners. He would keep in place some of the Bush tax cuts and institute a permanent R&D credit. He would increase the maximum capital gains tax rate from 15% to 25%, tax hedge funds managers' share of their clients' earnings as ordinary income rather than capital gains, and implement a payroll tax surcharge on people who earn more than $250,000 annually.
On trade, Obama suggests renegotiating the North American Free Trade Agreement, and implementing strong environmental and labor provisions in future trade deals. He wants to see a permanent renewable-energy tax credit to promote investment in wind and solar resources. He's in favor of legislation that would help workers join unions if they wish.
What do the two approaches have in common? Both could prove expensive. A recent study by the Tax Policy Center, a Washington think tank, says both candidates "have proposed tax plans that would substantially increase the national debt over the next 10 years"--Obama by $3.4 trillion, McCain by $5 trillion. The White House said Monday the federal deficit will reach a record $482 billion in fiscal year 2009--about $75 billion more than previously thought, thanks to the recent economic stimulus and economic downturn.
As if those things weren't enough, he wants to raise the capital gains tax. There is a reason that most companies tax capital lightly--actually several reasons. The first is that capital is mobile, and the second is that capital means new investment, which gives us shiny new things we like, such as fMRI machines and electric cars and yes, iPhones. Savings represents a tradeoff between current and future consumption. Given that peoples' time preferences are biased towards the present, we want to make the payoff to deferring consumption as attractive as possible.
Equity capital is taxed twice in this country--once when the company makes a profit, and a second time when the capital is distributed to its owners as dividends or capital gains. The combined rate is 15% + 35%=50%, or a whole lot higher than the personal income tax rate. This is not optimal for savings.
Ah, you will say, but corporations actually spend an enormous amount of time structuring their income to avoid taxes, so the rates aren't that high. But this is an equally big problem. All of that activity is an economic loss--it consumes resources that could be put towards something useful, like erasing all traces of the Neil Diamond box set from the face of the planet.
I know what you are thinking, my little chickadees--the corporations shouldn't do that. And perhaps you are right. But when you set up systems that cost people a great deal of money, they will go and try to minimize their tax bill, no matter how earnestly you explain that they are shirkng their social duty. And there is no government failure more dismal and glaring than the eternal attempts to "close the loopholes" in the corporate income tax. That's because most of the loopholes are actually there to alleviate valid concerns. Moreover, attempts to "close the loopholes" end up making the tax code vastly more complicated, which increases compliance expense, administrative expense, and uncertainty--and in many cases, actually create more loopholes than they closed.
Worst of all, the corporate income tax and the capital gains tax aren't really very good at doing what they are supposed to do, which is make sure that the bulk of our income tax burden falls on those who will miss the money the least. Let me posit something which isn't very controversial among tax professors no matter what their political party: you can't tax a corporation. That's because corporations have no feelings, and no assets, of their own. Ultimately, the money always comes from some person: customers, employees, owners, or even suppliers. But the corporate taxes are not targeted by need; they come from whoever the corporation can best squeeze the money out of. The old lady in Dubuque with 100 shares of AT&T pays the same 50% rate on corporate profits as Warren Buffett.
It would be much better to eliminate the corporate income tax and tax dividends and capital gains as ordinary income. Barring that, raising the combined rate on corporate profits to 60% from 50% is a very, very bad idea.
The rest of it doesn't wind me up particularly one way or the other--I don't think that higher marginal tax rates on the rich are going to plunge the economy into the next Great Depression, as McCain's team is implying, and I think the payroll tax should be rolled into the ordinary income tax, so raising the cap doesn't bother me particularly. Of course, I'd rather see him get serious about entitlements, but that's a rant for another day; once we've spent the money, we've already effectively taxed, and I don't think these other mechanisms are notably awful ways to raise the necessary cash. But the trade and capital gains components are bad enough to make me take a long, loving look at Bob Barr.
Too bad Megan wasn't around in 1992 -- she could have saved us from the economic horrors of the Clinton years, too.
Is there a journalist in the house who can offer up a criticism of raising the capital gains tax that isn't based on pure speculation?
Better empiricism, please.
McCain: Huh? Clinton ran as a NAFTA supporter and substantially reduced the budget deficit. Sort of the opposite of Obama.
Megan,
I think you meant to write countries instead of companies in this sentence:
Otherwise, good post. A couple additional points regarding Obama's proposals that you may want to cover in subsequent posts:
1) Lifting the cap on the Social Security portion of the payroll tax for those making over $250k.
2) Giving everybody in the country free health care.
Is it really going to matter how bad Barack's economic plan is., I mean I dont want to vote for either of these two but. At least Barack has the energy to do the job. I guess it doesnt matter. I dont think McCain can win as the GOP Nominee anyway. Could you imagine McCain even having enough energy to run your local Mcdonalds. Seriously. Think about it next time your in line watching the Mcdonalds manager run around taking orders and shouting orders. McCain couldnt do it. So I ask You, how will McCain be president??? Looks as though the RNC got behind the wrong candidate and they will pay for it., Guess they should of let the primary season play out without trying to minupulate the outcome.. Good news is i think McCain is just about done, I wouldnt doubt the GOP ditch him at the last second and run a younger more charasmatic charachter. Did you see him knock all that stuff off the shelf at the supermarket. the video is at http://www.mccanes.com all the while barack obama is looking like an NBA super star, (arrogence and all) even taking time to stop and have a cigar break video at http://www.theobamaplan.com
Too bad Megan didn't reach that conclusion until long after the r3VOLution died.
The more liberal you are the more you want to adopt policies that will shackle the economy. Because the more the economy falters, the more people will look to your government for "solutions." This will lead to the inevitable increase in power that liberal politicians want.
I say "liberal" only because they seem to do somewhat more of this than conservatives, and a lot more than libertarians.
I remember hearing/reading somewhere that the $250,000 figure for Social Security was on HOUSEHOLD income, not individual income which makes this even nastier.
So, right now, a couple each making $150,000 would pay into SSC on earnings up to $102,500. However, the $50,000 they make combined over the $250,000 cap would also be taxed. However, a non-married couple living together who each make $250,000 would still each only pay SSC on the first $102,500. Sounds like a marriage tax to me.
--mike
But Megan, you contradict yourself:
http://meganmcardle.theatlantic.com/archives/2008/07/what_gains_from_cap_gains.php
Capital gains tax income has less to do with rate than it does market performance, or so the graph you linked suggests. Is this all you have of the "scathic" review of Obama's tax plan? Did you forget to factor in the reduced spending due to less wars?
Better pundits please!
So. You are bourgeois counter-revoluntionary, just as I suspected.
Paul,
McCain wouldn't have been my pick for President, but I don't question his energy level. The man has been campaigning vigorously with seemingly no ill effects. That's got to be more physically draining than actually being President.
Taxing Cap Gains and Dividends at the same rate as employment income would be good in that it would hit the idle rich a bit harder, and move the burden off high-earning professionals (doctors, lawyers, bankers etc). Since that's me, I like the idea - but what about getting rid of tax free investments like the muni-bonds in which most of Tereza Heinz-Kerry's fortune is invested? Why is it "fair" that a billionaire pays a much lower overall rate than I do? how about eliminating the dividend tax entirely, and just increasing the corporate tax rate so it is the same as the highest tax bracket - basically collect all the tax at once?
No perfect answers, I'm afraid.
How does an-y-bod-y justify a "card check" law, which would require union representation if the union organizer can get cards signed by more than half of the labor force, in public, not necessarily all at once, with no secret ballot election?
People in the country have an affection for secret ballot elections, so the opposition to the card check bill would be fighting downhill, and except for union label babies most people "get it" that unions coerce individuals.
-dk
Good post, thanks,
Erasing all traces of the Neil Diamond box set would lead to us forgeting about the box sets and as everyone knows those who forget about the past are doomed to repeat it. I am not sure I can survive that.
While your point is well taken, let me be the obnoxious fellow who points out that your math is wrong. The total tax on capital gains is not 15%+35%, but rather 15% of what is left after 35% has been taxed. This would work out to a bit under 45%, which is still higher than decency should permit.
addendum: did not mean to be cute with "earnins"; also, the top corporate rate of 35% is on earnings abovbe $18 million and any trust earnings over $500, I believe.
A 10 yr A+ Muni pays about 4.25%, while a nice 10-yr AA first-mortgage utility bond pays about 5.85% taxable. You could say Therese is giving up that 1.60% (28% or so) to the State Government instead of the Feds by buying the muni.
Das ist mir wurst, Therese
If you think the payroll tax should be rolled into the income tax, then you should oppose the Obama proposal. Eliminating the cap doesn't make that move; instead it raises more money from the broken payroll tax system.
>It would be much better to eliminate the corporate
>income tax and tax dividends and capital gains as
>ordinary income.
How about Milton Friedman's idea from days of yore? (In Capitalism and Freedom and elsewhere.)
Stated in my words, make all corporations S corporations.
Shareholders pay taxes on profits, whether they're distributed or not. This would eliminate the need for cap gains taxes, because retained earnings are taxed every year.
Just a matter of setting the percentage(s)...
Steve
No, it's not. The 15% is taxed on the reduced principal. You can't just add it. There's this little thing called multiplication that you have to use when you are taking about double taxation. The combined rate is 45%.
You'd actually be raising it to 51.25%. Learn to use a calculator.
Don't forget inflation's effect on capital gains:
http://online.wsj.com/public/article_print/SB120778809913003525.html
>It would be much better to eliminate the corporate
>income tax and tax dividends and capital gains as
>ordinary income.
How about Milton Friedman's idea from days of yore? (In Capitalism and Freedom and elsewhere.)
Stated in my words, make all corporations S corporations.
Shareholders pay taxes on profits, whether they're distributed or not. This would eliminate the need for cap gains taxes, because retained earnings are taxed every year.
Just a matter of setting the percentage(s)...
Steve
As one of your bleeding heart liberal readers, I'm happy to tolerate your half-hearted support of conservative economic policies that have wrecked the country without leaving all kinds of snooty comments.
BUT, I draw the line when you pick on Neil Diamond.
Mom and I spent countless hours cleaning house together to that box set and I dare you to find a college town in America that doesn't go nuts when "Sweet Caroline" comes on the jukebox.
So, leave the Jewish Elvis out of this and continue trying to change my mind with numbers, stats and reasoned arguments.
Gotta second Tom B. on Neil Diamond. When it gets close to last call, the kids all still sing along to "Sweet Caroline" when it comes on the jukebox. Just because Megan has an iPod full of bands less-hip folks have never heard of doesn't mean she should disrespect the Diamond.
DaveinHackensack:
Don't kids know the history of that song? Neil Diamond has admitted he wrote it about Caroline Kennedy, when she was thirteen.
Too bad Megan wasn't around in 1992 -- she could have saved us from the economic horrors of the Clinton years, too.
Error - your snark has been rejected because it doesn't conform to the facts. Clinton had his dumbest, most fiscally ruinous initiatives (e.g. Hillarycare) torpedoed before they became law and the good luck to be President when an IT revolution with which he had nothing to do drove record economic growth with which he also had nothing to do. To the extent that he did adopt sound economic policies (e.g. NAFTA) it was in disagreement with liberal orthodoxy and, apparently, with Barack Obama.
I agree with Megan, Bob Barr is looking better all the time.
I just want to pay a flat rate. Why can't every adult, corporation, Church (tax exempt, my buns), etc. -okay, except the very poor- just cough up 18% of their income up front from the top of their check and be done with it. Why do we have to play with loopholes and tax shelters and this investment is taxed, while this one isn't and that one is, but only if such and such happens.
It's all a rich man's game... they're the only ones who can flipping hire somebody to figure out how not to pay their share.
Is this new math again....15% (Personal capital gains) + 35% (Corporate tax) = 50%?
If you have a hundred dollars and you get taxed 35% for a profit, you should have 65 dollars left. The 15% for the individual/investor capital gains comes out of the 65 dollar dividend. $65 x 15% = $9.75.
So, 35 + 9.75 = 44.75. This figure is probably the maximum. I don't know of any decent accountant that couldn't get you below the 44.75 tax rate.
"Nor is his support for letting employees bully their coworkers into joining unions exactly putting a spring in my step and a song in my heart."
Even as a union officer, I find card check a little problematic on grounds of principle. But the fact remains (and Megan shows very little understanding of this fact or sympathy for its consequences) that the law now lets employers bully employees into not forming unions. There are effectively *no* penalties for illegal behavior by companies during organizing campaigns. If you don't believe me, go talk to the multitude of lawyers who specialize in union-busting. Not surprisingly, such illegal behavior is both effective and rampant.
Criminalize violations of the NLRB, and I'll happily renounce card check. Having some employers go to jail for violating the universally recognized (by treaty, no less) right to organize will do far more to allow employees a real uncoerced choice about unionization than anything else.
McCain by default.
As Homer Simpson chanted, "De-fault, the two sweetest words in the english language. De-fault! De-fault! De-fault!"
Don't kids know the history of that song? Neil Diamond has admitted he wrote it about Caroline Kennedy, when she was thirteen.
I don't know about that, but I do know that his love of this great and beautiful nation, and hatred of all people with dark skin, led him to write "America."
http://members.aol.com/MLanza1974/ferrell/wf8.htm
Robert Levine: "There are effectively *no* penalties for illegal behavior by companies during organizing campaigns."
I assume you're referring to the oft-repeated but seldom proven claim that the organizers get fired? Or are you referring to something else?
Two wrongs do not make a right. If something is being done illegally and immorally by companies who would rather not have a union, I would prefer to see, and would probably back myself, legislation to prevent that, not legislation that puts a thumb on the other pan of the scale.
Card check is likely to do the most damage to the system in favor of a union such as the Teamsters, who have a well-deserved reputation for intimidation. If they send three 200lb men to the homes of employees to "persuade" them to fill out this card, they probably don't need to throw any punches. A union such as the oil, chemical and atomic workers' union that has no reputation for intimidation would not receive this benefit. Do we really want laws that will foreseeably help a union grow in proportion to its willingness to employ strong-arm tactics, or at least its reputation?
I would like you to show some solid cases of illegal behavior that meets the following conditions:
1: Card check would make that behavior substantially less effective. This one is important.
2: The illegal behavior cannot effectively be combatted by law enforcement.
-dk
Along the lines of "Warren Buffet's secretary shouldn't be paying taxes for his medical care", how about "Warren Buffet shouldn't be paying a marginal tax rate lower than his secretary", who is paying ordinary income rates rather than Buffet's 15% capital gains, with 15.2% payroll taxes on top of her higher tax rate. Anyone who doesn't believe this is unconscionable.
Moreover, the VAST majority of capital gains are from one stockholder buying another's shares. In other words, pure speculation. None of these transactions provide any gain to the real economy. I do not oppose a capital gains tax break for investments where cash is infused in the company itself, but do object to rewarding speculation (whether in stocks or housing or other non-productive assets).
No to mention, increasing taxes on the wealthy might just do something to decrease the wealth disparity, which is killing our country just as it did during the Great Depression. Rich people just don't buy enough stuff to support a growing economy.
Joe Klein's Conscience:
I had no idea that the song was written about Caroline Kennedy, so I doubt the kids know either.
Tax Lawyer:
I am skeptical of Buffett's claim that his secretary has a higher effective tax rate than him. As I wrote about this elsewhere when Megan mentioned this claim earlier this month:
TaxLawyer - Actually, trading a stock from one person to another is not generally "speculation". The stock is a share of the owndership of the company. Thus if the company has become more valuable (b/c they've developed some new product or service or figured out a more efficient way to do what they were already doing or whatever) there is no reason that owning the company shouldn't be worth more than it was and that this shouldn't be reflected when selling it.
If it helps, take the stock-ownership out of the equation. If Tom starts a dry-cleaning business and through cleverness and hard work builds it up into a thriving enterprise and then sells it to Dick, is this just speculation? Or is the ownership of that business actually worth something that can be traded? And if Dick creates some innovations that grow the business by 50% and then decides to sell it to Harry, why shouldn't it be worth more that it was when he bought it from Tom?
Now, of course, stock prices also reflect the sum-total of what participants in the market think will happen to the company in the future. To the extent that this drives the stock price, I guess it is "speculation" but the exact same thing will be present in our Tom-Dick & Harry dry-cleaning sales: when Dick and Harry buy it, they are "speculating" that the business will be able to continue its past performance. Perhaps they've seen it grow and they're "speculating" that they can continue that growth after taking it over.
Unless you're miffed by the idea of people owning a share of a company that they don't actually run. But then you've got the much, much worse situation of most of the capital being held by people who have no way to get it to those blessed few with good ideas of how to produce more in the economy.
The derivatives market, on the other hand, is a zero-sum game overall. Every trade in it has a winner and a loser. This is not to say that the externalities it creates don't have a positive benefit for the economy as a whole (like the ability for companies to hedge away some of the risk they face on costs of inputs), it's just to say that the market itself is, in effect, a running series of bets. Since there have to be people on both sides for it to be a bet, it is a zero-sum game.
So here you have some participants who are just betting, or "speculating" as you have it. But, since the market can't run without someone taking the other side of every bet, to the extent that the hedging provides benefit to the economy as whole, these speculators are providing value to the economy as a whole, whether they intend to or not.
Might as well post the rest of what I wrote then about Buffett and taxes, because it's relevant to this discussion:
1. Then how do we raise revenue?
2. Yes, please vote for Bob Barr.
"But the trade and capital gains components are bad enough to make me take a long, loving look at Bob Barr."
My guess is that if you openly supported Barr on your site, you would be doing more to help Obama than outright support of Obama does.
"get serious about entitlements"?
Oh god.
"As if those things weren't enough, he wants to raise the capital gains tax."
Nobody is in the investor class anymore. Everyone was pushed out by 30 years of Reaganomics. Nobody cares about cap gains tax anymore. We're just trying to survive out here.
YOUR MATH SUCKS.
Let's assume that corporations ACTUALLY pay that 15% tax on profits (a majority do not, according to Citizens for Tax Fairness). What's left is 85%; that 85% is disbursed to shareholders who are taxed not at 35%, but between 5% and 28%. http://www.bankrate.com/brm/itax/news/taxguide/review-rates1.asp
So that, effectively, is 5%-28% of 85%, which is far less than the ZOMGWTF50% rate you cite.
Meggy, it'd be better for all concerned if you just admit that you don't know what the *&%$ you're talking about. Just come out and say it: your caste should not have to pay taxes, which will only go to paying for welfare queens' deuce-four rims.
The idea that the wealthy investment class should pay 15% on its earnings while the working productive class can pay as much as 25% is simply a statement proclaiming the "thinker" to be a supporter of indentured servitude... that they are elitist, King George Tory throw-backs.
Which part of these people do I rightly question? Is it a problem with their integrity, their religion, their upbringing, their honesty, or their intellect?
I got about a million I could, with a decent stock market (of course that's another story), get $70,000 to $100,000 a year in dividends and pay only 15% taxes on. It's tempting to want to accept this idea and retire from my productive live and live off the labor of others... very tempting. But unfortunately I realized some time ago this wasn't all just about me. That the neat thing about being a human being was that I could act civilized and realize a deeper cause and drive then my nature driven ego that wolves and tigers live by. I could project out into the future and plan it to be better for my offspring. Some time ago I realized maybe there's a bigger picture here that allowed me to be successful that didn't involve selfishness, shortsightedness and massive concentrations of wealth, plutocratic rulers and inbreed privileged class. Thank God such things didn't precede my birth.
The idea that the wealthy investment class should pay 15% on its earnings while the working productive class can pay as much as 25% is simply a statement proclaiming the "thinker" to be a supporter of indentured servitude... that they are elitist, King George Tory throw-backs.
Which part of these people do I rightly question? Is it a problem with their integrity, their religion, their upbringing, their honesty, or their intellect?
I got about a million I could, with a decent stock market (of course that's another story), get $70,000 to $100,000 a year in dividends and pay only 15% taxes on. It's tempting to want to accept this idea and retire from my productive live and live off the labor of others... very tempting. But unfortunately I realized some time ago this wasn't all just about me. That the neat thing about being a human being was that I could act civilized and realize a deeper cause and drive then my nature driven ego that wolves and tigers live by. I could project out into the future and plan it to be better for my offspring. Some time ago I realized maybe there's a bigger picture here that allowed me to be successful that didn't involve selfishness, shortsightedness and massive concentrations of wealth, plutocratic rulers and inbreed privileged class. Thank God such things didn't precede my birth.
"Equity capital is taxed twice in this country--once when the company makes a profit, and a second time when the capital is distributed to its owners as dividends or capital gains. The combined rate is 15% + 35%=50%, or a whole lot higher than the personal income tax rate"
Baloney!
"The GAO study found that 71 percent of foreign-controlled corporations operating in the United States paid no taxes in those five years; nor did 61 percent of US-controlled companies."
"Those untaxed corporations earned $3.5 trillion of revenues."
And a lot of them were earning money via government contracts and the real taxpayers treasury.
from;
http://www.csmonitor.com/2004/0419/p16s03-cogn.html
7 to 10% annual return in the stock market even in good times on one million is highly unlikely. Even if you had 10 or twenty times that amount you would be hard pressed to find the talent that could earn that rate consistently.
Obama's ideas of payroll taxes over 250k is stupid beyond measure and cynical as well. First by doing that he is telling everyone below the mark that they are fools since the next 150 is free. That lucky group, Obama supporters no doubt get in essence a rate cut for themselves while those above and those below get the shaft.
Obama's and the democrats NAFTA and tax ideas are the the same idiocy the Herbert Hoover implement and FDR maintained.
The solution is not raising taxes, but cutting spending starting with "entitlements". And eliminating union featherbedding and bid rigging on government contracts at all levels and onerous and unnecessary government interference in the market place. The money belongs to the taxpayers and not to the parasites.