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I am a Barack Obama fan
-- I'll vote for him in November -- but his tax plan, as presently conceived,
is pretty ugly stuff. It is not only a marginal negative, but could add a
whole new aspect of economic deterioration for the U.S., which is already
struggling with monetary inflation and a credit breakdown. It will be
interesting to see how this plays out in 2009 -- interesting in the way a
train crash is interesting.
Economic Policy statement from
Obama's website
Heritage Foundation on Obama's tax
plan
Here's a summary of
what's on the agenda (which could change):
1)
Increase taxes on capital gains from 15% to 28% or even 35%.
2)
Probably make dividends (now 15%) taxable as regular income again.
3)
Raise the top income tax rate back to 39.6% from 35%.
4)
Remove personal exemptions and deductions for those with income over
$250,000.
5)
Make income over $250,000 subject to Social Security taxes, of 15.65%
(including both employee and employer contributions). This would make the
effective top income tax rate over 56%. When adding various state and local
income taxes, this would mean top income tax rates over 65% in places like
California and New York.
6)
A tax credit of $500 per person, to offset payroll taxes on the
lowest-income earners
7)
Eliminate income taxes for seniors making less than $50,000.
An economy can function
reasonably well under high income tax rates, if the rates fall on high
incomes. In 1965, for example, the top income tax rate was 70%, but you
needed to make $100,000 (about $1,500,000 today) to pay that rate. We're
looking at rates near 70%, if the Social Security cap is eliminated (note
that it was Bill Clinton that eliminated the corresponding cap on Medicare
taxes), but on incomes of $250,000. In 1955, for example, the top income tax
rate was 91% on incomes over $400,000, which is about $6,000,000 today.
However, on incomes of $16,000 to $20,000 (about $240,000 - $400,000 today),
the rate was 30%. Plus, payroll taxes (Social Security, Medicare didn't exist
yet) were much lower. The original Social Security tax rate was 2% (1%
employee and 1% employer). This was raised to 4% (2%+2%) in 1956, and to 6%
(3% + 3%) in 1961. The rate today is 15.30% (7.65% + 7.65%).
IRS info on historical US tax rates and
exemptions
Detailed info on historical US tax
brackets
Capital gains taxes have
some of the largest negative effects on an economy, since they so clearly
obstruct the accumulation of capital which is so important for providing
investment and good jobs for workers. We looked at the capital/labor ratio a
few weeks ago:
The Capital/Labor Ratio
These capital gains tax
hikes are bad in any case, but potentially more so in an environment of
inflation. The capital gains tax is not adjusted for inflation. When the
dollar falls to $0.50, investments need to double in nominal terms just to
keep pace with the inflation. This phantom "gain" is taxed at a
high rate, thus eliminating that much more capital from the system.
Indeed, a capital gains
tax hike is also a very "1970s" element, as Richard Nixon signed a
big capital gains tax hike in 1969. This was eliminated in 1979, producing a
rather nice boom in certain subsets of the economy.
Info on the 1979 capgains tax cut
Much the same applies to
the income tax. One of the difficulties encountered in the 1970s was
"bracket creep." In 1970, the 70% tax bracket applied to income
over $200,000, or almost $3,000,000 today. In 1979, the dollar's value had
fallen by about 10x, but the 70% rate still applied to income over $215,400.
Today, tax brackets are automatically adjusted to the government's CPI, but
the CPI is such a fiction these days that we are rather close to having no
inflationary adjustment at all. Thus, in effect we have a potential
combination of both higher tax rates and bracket creep, which could be quite
troublesome. We don't know today how far this inflation will go. Ten years
from now, the highest tax bracket and its 65%+ effective rate might apply to
the equivalent of $50,000 today.
The giveaways for
lower-income workers are fine, but wouldn't have much economic effect besides
the welfare aspect. The $500 "tax credit" is essentially the same
as the $600 check-in-the-mail that the government is presently handing out.
Nevertheless, I support lower taxes for lower incomes. This is something that
the Republican types have missed, I think. They have wanted to focus their
tax-cutting efforts on the part of the tax code which has the most dramatic
negative effects -- high income tax rates and taxes on capital. However, by
doing so, they have justifiably been criticized for ignoring the lower income
workers. I think they would find more political support if they cut taxes for
everyone at the same time. Obama's plan to make $50,000 of income tax-free for
seniors is fine, but I would expand it to all taxpayers. Give everyone a
$50,000 basic deduction. (Or $20,000 per adult and $10,000 per kid.) Taxes
paid by households with less than the median income (about $48,000 if I
recall) account for only about 4% of income tax receipts, and of course an
even smaller portion of total tax receipts.
The idea that the
"distribution of income" can be resolved by high taxes on capital
doesn't work well in practice. One of the reason that some European systems
have worked passably well is that taxes on capital and corporations are low,
which allows more capital accumulation, which provides the investment for a
broader middle class. Germany, Japan, Singapore and Korea traditionally have
not taxed capital gains at all. Nothing particularly bad happened. In fact,
something good happened -- these capital-rich environments have plenty of
good jobs available.
After raising taxes all
over the place, much of the rest of Obama's "economic plan" (mostly
it is a collection of irrelevancies that would have little economic effect)
consists of -- tax credits! Tax credits for manufacturing, for children and
dependents, for mortgages, for colleges, for clean technologies, for
"locally owned biofuel refineries," and
for R&D.
In practice, usually
governments (and even venture capitalists for that matter) have little idea
what the next avenue for economic expansion will be. The personal computer
was poo-poohed when it was invented. So was the
transistor, which engineers thought would be useful for hearing aids perhaps
but would not replace the vacuum tube. It doesn't have to be technological
either -- look at Starbucks' coffee business. Making lattes is just as
legitimate a business as hard drive manufacturing and airlines, and probably
more profitable too. Coca-Cola has been a bigger homerun than all the DRAM
manufacturing of the past 20 years. Maybe the nexus of future activity will
be railroads! If you simply remove the barriers to investment and commerce in
general -- capital gains taxes or corporate taxes for example -- then people
are free to experiment with all sorts of things, and find out what works.
This is a far better method than having a government bureaucrat try to guess
that "locally owned biofuel refineries"
(which are now going bust en masse due to higher corn prices) are the wave of
the future. On a personal level too, if the first $50,000 of income was
exempted from taxes, then people could spend their own money however they
wish, on colleges, child care or whatever. For Democrats who are having
trouble with this idea, you can think of it as a "tax credit for
living."
Of course, these are just
plans and proposals at this stage. We could find that the electorate tries to
block these tax hike plans by stuffing Congress with Ron Paul Republicans --
in favor of lower taxes, no wars, and police state rollback. So, if you're
running for Congress this year as a Republican, that's the platform I'd
choose. If you're running as a Democrat, you could adopt the same platform,
come to think of it.
* * *
The amazing thing about hyperinflation in Zimbabwe and similar cases, is
that people even continue to use the currency at all. At some point long
past, you'd have thought they'd go to black market euros,
or cigarettes, or sacks of wheat or copper pipe or cowrie
shells or AK47 ammunition or whatever. I think this is illustrative of the
degree to which people are caught up in the fantasy that prices in a
collapsing currency have any meaning at all -- the degree to which people
continue to use money as a counting-unit even when it obviously is unsuited
for the task. "The price of milk went up 1,000,000,000%!!!" Yeah,
sure it did. Nothing at all happened to milk. The only difference is more
paper. You'd think people would at least go to barter of some sort: I'll work
for eight hours in return for five gallons of diesel. Something like that. In
which case, the "inflation rate" would be irrelevant, just a game
someone is playing somewhere. Milk would be milk, diesel would be diesel, and
the paper money would be losing value as usual -- nothing new there.
We are still in the early
stages of inflation in the U.S., but even later, when the inflation is
perhaps more intense, people will tend to regard prices as changes in the
value of goods, rather than the value of money. On Jim Puplava's
radio show last year, I said that we could see oil prices of $1,000 a barrel
before this episode is over, within 6-8 years perhaps. (This seemed rather
reckless at the time, when even the bulls were whispering about $100 oil, but
I think that mainstream Wall Street analysts have talked about $500 oil in
recent weeks.) Most of this would be simply a change in the monetary counting
unit. Some of it would be due to "Peak Oil" issues. It would be
$100/barrel oil, up 4x from the $25/barrel oil of the 1990s, but the dollar
would be worth only $0.10 -- or 1/3,500 oz. of gold, from 1/350 in the 1990s.
I still think that could happen (though oil is due for a correction in the
short term). Most people's eyes would bug out of their heads, but what did
you think was going to happen when the dollar goes to $0.10? In the 1970s,
oil went from $2.50 to $40. Nobody asks why it didn't go back to $2.50
afterwards, but stabilized around $25 or so. Maybe I should say: when the
dollar goes from $0.10 to $0.01. At $18 silver, my 90% silver dimes from the
1950s are worth about $1.26 each today. Apparently, the dollar is already
worth less than $0.10!
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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