Obama and the Tax Tipping Point
How long before taxpayers are pushed too far?
By ADAM LERRICK
What happens when the voter in the exact middle of the earnings spectrum receives more in benefits from Washington than he pays in taxes? Economists Allan Meltzer and Scott Richard posed this question 27 years ago. We may soon enough know the answer.
Barack Obama is offering voters strong incentives to support higher taxes and bigger government. This could be the magic income-redistribution formula Democrats have long sought.
Sen. Obama is promising $500 and $1,000 gift-wrapped packets of money in the form of refundable tax credits. These will shift the tax demographics to the tipping point where half of all voters will receive a cash windfall from Washington and an overwhelming majority will gain from tax hikes and more government spending.
In 2006, the latest year for which we have Census data, 220 million Americans were eligible to vote and 89 million -- 40% -- paid no income taxes. According to the Tax Policy Center (a joint venture of the Brookings Institution and the Urban Institute), this will jump to 49% when Mr. Obama's cash credits remove 18 million more voters from the tax rolls. What's more, there are an additional 24 million taxpayers (11% of the electorate) who will pay a minimal amount of income taxes -- less than 5% of their income and less than $1,000 annually.
In all, three out of every five voters will pay little or nothing in income taxes under Mr. Obama's plans and gain when taxes rise on the 40% that already pays 95% of income tax revenues.
Calculating how far society's top earners can be pushed before they stop (or cut back on) producing is difficult. But the incentives are easy to see. Voters who benefit from government programs will push for higher tax rates on higher earners -- at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country.
Other nations have tried the ideology of fairness in the place of incentives and found that reward without work is a recipe for decline. In the late 1970s and throughout the 1980s, Margaret Thatcher took on the unions and slashed taxes to restore growth and jobs in Great Britain. In Germany a few years ago, Social Democrat Gerhard Schroeder defied his party's dogma and loosened labor's grip on the economy to end stagnation. And more recently in France, Nicolas Sarkozy was swept to power on a platform of restoring flexibility to the economy.
The sequence is always the same. High-tax, big-spending policies force the economy to lose momentum. Then growth in government spending outstrips revenues. Fiscal and trade deficits soar. Public debt, excessive taxation and unemployment follow. The central bank tries to solve the problem by printing money. International competitiveness is lost and the currency depreciates. The system stagnates. And then a frightened electorate returns conservatives to power.
The economic tides will not stand still while Washington experiments with European-type social democracy, even though the dollar's role as the global reserve currency will buy some time. Our trademark competitive advantage will be lost, and once lost, it will be hard to regain. There are too many emerging economies focused on prosperity and not redistribution for the U.S. to easily recapture its role of global economic leader.
Tomorrow's children may come to question why their parents sold their birthright for a mess of "fairness" -- whatever that will signify when jobs are scarce and American opportunity is no longer the envy of the world.
The reason I like this Op-Ed so much is because we have seen this before. What the Obamessiah is proposing isn't anything new - it's been tried numerous times throughout history. And the results are predictable.
We truly are walking a fine line with our historical competitive advantage. We've been lucky that the rest of the world has already made the mistake to a larger degree than what we have ever attempted. But, we're about to double-down on a failed economic strategy, and once implemented, it is difficult to reverse. And, even if we do, other economies will be further along in innovation and progress than we are.
There will be no going back. I predict that at some point, we will see an emigration from the US to other, more productive economies. Capital - especially human capital - goes to where it is appreciated most.
ARC: St Wendeler