BARACK OBAMA
the more things change...
Contrary to popular belief and conventional wisdom, Barack Obama represents no dramatic change. While slight differences do exist between his platform and Ms. Clinton's, there is generally very little to differentiate Obama from the typical liberal ideology. Not that there's anything terribly wrong with that ideology, but let's be honest here: the "agent of change" persona that Obama enjoys is simply an artificial creation of savvy political marketing, not a result of any significant departure from the status quo.
Case in point: his stance on Social Security. He plans to relieve the burden that Social Security will place on future generations increasing taxes on the wealthy. Redistributive measures financed by progressive taxation-- haven't we heard that one before? It's a great idea... on paper. In reality, it almost always fails to achieve it's stated purpose, and ultimately causes numerous unintended consequences and hidden costs. We should have learned by now that increasing taxes on the wealthy is simply an indirect way of increasing taxes on middle and lower class citizens.
To demonstrate this, I'll offer a realistic hypothetical and a recent example of how taxes "don't stay where they are put." Say, for instance, that we impose some sort of expropriation on doctors and lawyers-- professions typically held by financially well-off individuals. Well, what would we expect to happen next? Doctors and lawyers increase their fees to recoup the lost revenue, simply passing along the additional costs to consumers via increased prices. The general public ends up footing the bill.
What's worse, increasing taxes on the wealthy causes myriad unintended consequences. For a real-world example, look no father than the first George Bush, he of "read my lips fame." Bush, again looking to tax the wealthy, imposed a sales tax on a variety of luxury items, notably yachts. Seems logical, right? People who buy yachts are, without exception, very wealthy individuals. But people who build yachts aren't, they're generally blue-collar craftsmen. Would-be yacht owners simply bought their yachts overseas to avoid the tax. Domestic yacht production plummeted, and thousands of blue collar workers lost their jobs. The policy actually decreased the tax contributions of the yacht industry, as many producers went out of business. The negative effects even spread to industries which supply inputs for yacht building (lumber, glass, etc.), forcing even more people out of work. The yacht tax was repealed less than a year after its passage.
There is a common misconception that economics is merely a study of price and profits, and its wisdom only useful when dealing directly with "The Economy." But economics is much more than that; it is a study of rational choice. Economists do not study business so much as they study behavior, and how that behavior changes in response to different incentives. Increased taxes provides the wealthy with an incentive to pass along the cost to consumers (as in the first example), or to evade the tax altogether through various means (as in the second). When Andrew Mellon became Treasury Secretary in 1920, he announced that he would increase tax revenue by lowering tax rates. Most non-economists though he was either crazy, stupid, corrupt, or some combination of all three. He cut taxes on the wealthy from a staggering 73% to 25%, and on the poor from 4% to 3%.
Lo and behold, it worked-- total tax revenue rose from $690 million in 1921 to $710.2 million in 1928. Even more astounding, even though the decreased tax rates were supposedly a windfall to the wealthy, the percentage of total tax revenue paid by high income earners rose from 28.1% ($194 million) to 50.9% ($361.5 million). The percentage paid by low income earners fell from 22.5% ($155 million) to just 4.5% (32.5 million). Cutting tax rates to increase tax revenue wasn't crazy or stupid-- it was brilliant. Mellon realized that a 73% tax rate was plenty incentive to avoid holding taxable assets. All he did was change the incentive.
Obama insists that we "keep our promise," refusing to consider decreasing benefits, but he ignores the fact that the nature of that promise has changed since we made it. When Congress passed the Social Security Act in 1935, the average life expectancy was 62.9 years. In other words, most people wouldn't live long enough to receive benefits. Life expectancy has risen to around 78 years, so the percentage of the population expecting benefits has skyrocketed. Furthermore, even though the average 65-year-old today is much healthier than his 1930s-era counterpart, only 17.5% of senior citizens hold jobs today, compared to 43.5% in 1940. No wonder that the payroll tax used to fund Social Security has risen from 2% to 18%.
That being said, I do not endorse the typical Republican counterpart- the outright privatization of Social Security funds. My point is that Obama seems to be looking for an easy answer, specifically one that is politically favorable in its appeal to the AARP voting bloc. But we cannot expect to fix a problem if we fail to identify its true cause. And increasing taxes on the wealthy is rarely the right solution.
Contrary to popular belief and conventional wisdom, Barack Obama represents no dramatic change. While slight differences do exist between his platform and Ms. Clinton's, there is generally very little to differentiate Obama from the typical liberal ideology. Not that there's anything terribly wrong with that ideology, but let's be honest here: the "agent of change" persona that Obama enjoys is simply an artificial creation of savvy political marketing, not a result of any significant departure from the status quo.
Case in point: his stance on Social Security. He plans to relieve the burden that Social Security will place on future generations increasing taxes on the wealthy. Redistributive measures financed by progressive taxation-- haven't we heard that one before? It's a great idea... on paper. In reality, it almost always fails to achieve it's stated purpose, and ultimately causes numerous unintended consequences and hidden costs. We should have learned by now that increasing taxes on the wealthy is simply an indirect way of increasing taxes on middle and lower class citizens.
To demonstrate this, I'll offer a realistic hypothetical and a recent example of how taxes "don't stay where they are put." Say, for instance, that we impose some sort of expropriation on doctors and lawyers-- professions typically held by financially well-off individuals. Well, what would we expect to happen next? Doctors and lawyers increase their fees to recoup the lost revenue, simply passing along the additional costs to consumers via increased prices. The general public ends up footing the bill.
What's worse, increasing taxes on the wealthy causes myriad unintended consequences. For a real-world example, look no father than the first George Bush, he of "read my lips fame." Bush, again looking to tax the wealthy, imposed a sales tax on a variety of luxury items, notably yachts. Seems logical, right? People who buy yachts are, without exception, very wealthy individuals. But people who build yachts aren't, they're generally blue-collar craftsmen. Would-be yacht owners simply bought their yachts overseas to avoid the tax. Domestic yacht production plummeted, and thousands of blue collar workers lost their jobs. The policy actually decreased the tax contributions of the yacht industry, as many producers went out of business. The negative effects even spread to industries which supply inputs for yacht building (lumber, glass, etc.), forcing even more people out of work. The yacht tax was repealed less than a year after its passage.
There is a common misconception that economics is merely a study of price and profits, and its wisdom only useful when dealing directly with "The Economy." But economics is much more than that; it is a study of rational choice. Economists do not study business so much as they study behavior, and how that behavior changes in response to different incentives. Increased taxes provides the wealthy with an incentive to pass along the cost to consumers (as in the first example), or to evade the tax altogether through various means (as in the second). When Andrew Mellon became Treasury Secretary in 1920, he announced that he would increase tax revenue by lowering tax rates. Most non-economists though he was either crazy, stupid, corrupt, or some combination of all three. He cut taxes on the wealthy from a staggering 73% to 25%, and on the poor from 4% to 3%.
Lo and behold, it worked-- total tax revenue rose from $690 million in 1921 to $710.2 million in 1928. Even more astounding, even though the decreased tax rates were supposedly a windfall to the wealthy, the percentage of total tax revenue paid by high income earners rose from 28.1% ($194 million) to 50.9% ($361.5 million). The percentage paid by low income earners fell from 22.5% ($155 million) to just 4.5% (32.5 million). Cutting tax rates to increase tax revenue wasn't crazy or stupid-- it was brilliant. Mellon realized that a 73% tax rate was plenty incentive to avoid holding taxable assets. All he did was change the incentive.
Obama insists that we "keep our promise," refusing to consider decreasing benefits, but he ignores the fact that the nature of that promise has changed since we made it. When Congress passed the Social Security Act in 1935, the average life expectancy was 62.9 years. In other words, most people wouldn't live long enough to receive benefits. Life expectancy has risen to around 78 years, so the percentage of the population expecting benefits has skyrocketed. Furthermore, even though the average 65-year-old today is much healthier than his 1930s-era counterpart, only 17.5% of senior citizens hold jobs today, compared to 43.5% in 1940. No wonder that the payroll tax used to fund Social Security has risen from 2% to 18%.
That being said, I do not endorse the typical Republican counterpart- the outright privatization of Social Security funds. My point is that Obama seems to be looking for an easy answer, specifically one that is politically favorable in its appeal to the AARP voting bloc. But we cannot expect to fix a problem if we fail to identify its true cause. And increasing taxes on the wealthy is rarely the right solution.
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