Saturday, July 14, 2007

Jeff's Law Of Tax Policy: You Can't Soak The Rich Without Drowning The Middle Class

From IBD Editorials. Bold emphasis mine. For more on my take about the vilification of Big Oil, go here.


Tax Warfare

By INVESTOR'S BUSINESS DAILY | Posted Friday, July 13, 2007 4:20 PM PT

Taxes: Congressional Democrats say they want to raise taxes as part of a much bigger effort to redress growing inequality in America. What they really have planned is something else: A war against American capital.

Every American should care. For while the debate revolves around billionaires and what they pay in taxes, it actually involves all of us who own a business, invest in the stock market or, indeed, have jobs.

The new Congress has quietly pushed a series of tax hikes — often without really saying as much — that would raise the cost of capital in the U.S. and make it more expensive to hire labor. They'd also boost the tax bill of the average household by an average $2,000.

This is a nightmare not only for American business, but also for workers. Over time, it will lead to European-style stagnation, with slow growth and high unemployment.

Here are just a few things that have been proposed or discussed:

Increasing taxes on key U.S. industries, like oil. Enraged at Exxon-Mobil's $39 billion in profits last year, Democrats want to boost tax rates on U.S. oil companies to 35% from 32%.

• Taxing performance fees for private equity-capital companies at 35% instead of 15%. This came about after news broke that Blackstone Group CEO Stephen Schwarzman earned $9 billion by taking his company public.

• Boosting rates on capital gains and dividends to "offset" an expected fix of the alternative minimum tax. The AMT, created in 1969 to make sure 122 millionaires could no longer avoid taxes, now hits 20 million taxpayers, most of them middle-class.

• Letting President Bush's tax cuts expire. This will raise tax rates by 10% on the wealthiest Americans and a whopping 50% on those in the bottom brackets. It also will jack up rates on personal capital gains to 20% from the current 15%.

All told, the taxes Democrats want to raise will add nearly $3 trillion to America's tax bill over a decade. And without fixing any of the problems we have with soaring entitlements.

They argue that most, if not all, these taxes will be levied on corporations and the so-called rich. They have a point: Today, some 60 million adults either pay no taxes at all or don't have to file. The rich pay most of our taxes.

But those taxes are really a tax on the entire economy. For the "rich" make up the bulk of entrepreneurs and creators in our society. Targeting them hits the rest of us harder than we think.

Take capital gains. In 2004, the most recent year data are available, the top 1% of incomes took home 59% of capital gains. For Democrats, this is a class-warfare slam-dunk: Tax them to death.

But a U.S. Treasury study last year found that keeping current capital gains and dividend rates in place would boost GDP by 0.2% to 0.3% a year. That's $30 billion to $40 billion in added growth. Wages, the study implied, would rise by a similar amount.

Remember that 80 million of us, or more than half the work force, own stocks individually or through IRAs and 401(k)s. Higher cap gains taxes mean fewer capital gains. Ditto for dividends.

Think boosting taxes on corporations will help? Most people don't realize that corporate taxes aren't paid by corporations, but by consumers and workers. You're taxing yourself, not them.

In short, the taxes that Democrats want to impose will bring to a halt the economic growth that tax cuts helped bring about. That hurts all of us — not just the rich.