September 24, 2007

Earth to Obama: Work and Wealth Are Not At War

Oh goody. Barack Obama wants to cut taxes.

Well. Not really. Resurrecting the phoniest of all Bill Clinton’s campaign promises, Obama is calling for a middle-class tax cut, which will be accompanied by a repeal of the Bush tax cuts for the group Obama calls “the wealthiest 1 percent of Americans.”

Why give a break to one group while socking the other? Because, Obama says, the current tax code “rewards wealth instead of work.”

Oh my. Where to begin?

Let’s put aside, for a moment, the question of how wealth is produced, or conversely, what results from wisely directed work. We’ll get back to that. Let’s talk first about the purpose of tax policy.

Tax policy needs to effectively do one thing while avoiding doing another. The thing it needs to do is raise revenue to fund essential government operations. The thing it needs to not do is rob the private sector of too much capital.

Contrary to what many Democrats seem to believe (and to be honest, many Republicans as well), the purpose of tax policy is not to raise as much as you possibly can for the government. It’s to raise what you need. If you raise more than you need, you just robbed the private economy of capital that could have been used to create more wealth. And yes, creating private-sector wealth is a good thing – regardless of who controls it.

If Obama believes people in a certain income bracket (the vaunted “middle class”) are paying too much in taxes, he should cut their taxes. No argument. He also says he wants to make it possible for them to file their tax returns in five minutes, which sounds good, although you might not like the reason he says it’s possible. (The IRS is already mining information from your bank account, so they can send you a pre-prepared form and save you the trouble. What great news!)

But a middle-class tax cut achieves neither of the goals of tax policy. It doesn’t protect the private economy from the loss of capital, because the middle class pays a very tiny percentage of federal taxes. And it doesn’t raise much more revenue to fund government operations, although it might raise some by spurring a small amount of private-sector spending.

But Obama clearly doesn’t believe it does, or he wouldn’t be starting with the usual Democratic song-and-dance about raising taxes on the rich in order to “pay for” the middle-class tax cut.

Raising taxes on the rich may or may not bring in more money to fund government operations, but it would probably not, because history has shown that the federal Treasury takes in more revenue when the highest marginal rates are lower. The Treasury is taking in more money now than it was before Bush cut taxes in 2001 and again in 2003 – because the tax cuts spurred economic growth.

Does Obama know this? The question is probably moot, because even if he knows the facts, he probably doesn’t understand them. Everything Obama says about tax policy suggests that his view of why it exists is far removed from the reality.

This brings us back to Obama’s primary complaint – that the tax code rewards wealth when it should reward work.

In Obama’s world, work and wealth are apparently at odds with each other. This is a strange world indeed, as the relationship between wealth and work – at least in the real world – is reciprocal and co-dependent.

Work creates wealth. Wealth finances work. If Obama doesn’t understand this, he should not be allowed anywhere near economic policy.

But Obama apparently believes the purpose of tax policy is to take sides in a rivalry between wealth and work that exists in his imagination. Reward work while punishing wealth? Perhaps we should expect this kind of thinking from a politician who has only ever spent one year working in the private sector.

But no matter. Obama is clearly only trying to ape Clinton’s 1992 success by dangling the middle-class tax cut in front of gullible voters. Perhaps the voters will remember that Clinton announced – 17 days into his presidency – that he had “tried harder than I’ve ever tried to do anything in my life” to keep the middle-class tax cut promise, “but I can’t, because the deficit has increased so much.”

There will be no middle-class tax cut. And since Obama has none of the political skill of the man he is trying to emulate, there will be no President Obama, either.