The Economics of Tax Cuts versus Obama’s Plan to “Tax the Rich”

Obama’s plan is to increase taxes on those who make more than 250k per year, or rather, tax the rich folks who get richer under a Republican tax policy, while the poor get poorer. This is what the democrats sing anyway in order to tug at the emotional strings of middle America and those even less fortunate. But, let’s evaluate this tune.

• One of the major purposes of tax cuts is to generate tax revenues – how? – by encouraging people to take their money out of tax shelters and tax-free securities and invest that money in something that will benefit the individual investor, stimulate economic growth and create jobs (i.e., investing in equity capitalization for large institutions, small businesses, startups and new enterprises, etc.). In plain speak, the people with the capital to do so – move their money into company stocks, for example.

When companies have more capital they produce more, they innovate, they expand, they reach further into the market and in turn, create more jobs for the lower and middle classes. All of these things help move our economy and our country forward. So, why didn't the Bush tax cuts move our economy forward(?) you might ask. Because good tax policies need to be part of a strong holistic economic policy package (foreign and domestic), predicated upon strong oversight and strong relationships with other foreign countries, among other things.

• Under the great Ronald Reagan, who put forth one of the largest tax cuts amidst cries from the left of ‘tax cuts for the rich’, tax revenues increased more than they ever had with people in the largest income brackets paying not only a larger amount of taxes than before, but a higher share of all taxes than before.

Wait, the rich had the largest tax cut but then had an increase in taxes?? This doesn’t make sense(!) say the left. Sure it does. First the tax policies of Reagan, Bush (and McCain) do not cut taxes per say but rather, they cut tax rates. Second, income is not a fixed amount during economic change - whether you make 35k per year or 350k per year. Economic change does not simply affect one class of folk for the better and another class for the worse. During an economic downturn, everyone hurts. On the flip side, when economic activity is stimulated and the economy expands, and incomes and employment rise, so do tax revenues. Those in higher income brackets start bringing in more income thereby increasing the total taxes they pay as well. So, they make more and pay even more in taxes despite a tax rate cut. Simple economics.

The real test of an economic policy is whether or not it can produce a rising tide that lifts all boats (Thomas Sowel, a fellow at the Hoover Institution wrote).

Obama wants to raise dividend and all capital gains taxes on those who make 250k or more. First, I don’t know if this is per person or per household but 250k per year certainly does not make one wealthy particularly since most people have to work their way up to that point after many years of hard work and paying off debts (i.e., school loans, business loans, children through college, etc.).

Liberals say that these tax increases do not and will not affect lower income families. Really? I beg to differ. In simplistic terms - every company needs capital. Capital equals investment. Because Obama’s plan to tax dividends penalizes equity investment like stocks and mutual funds and rewards debt investment such as bonds, company stocks are devalued and stocks are devalued relative to bonds. This goes back to the point earlier about the major purpose of tax cuts. Under Obama's plan, accountants and bankers across the country, are going to recommend individuals start moving their money away from stocks and mutual funds in order to maximize their investments. Schwab has already started advising investors as such in prep for an Obama Presidency.

The bottom line: I simply can’t believe that devaluing stock prices (and thereby US stock values) for any American business and its stock holders – is a good thing, either for economic growth and prosperity or for the middle income, working class.