By Stephen P. Milner
The economy has become the central issue of this year’s election. Both candidates claim they are the best choice to fix or better the economy.
In addition to increased oversight over financial markets, both Barack Obama and John McCain rely on tax-cuts in their stimulus plans.
Obama relies on a “bottom-up” approach: cut taxes for the middle class but raise them on the wealthiest Americans. Essentially, he would retain all the Bush tax cuts (so demonized by the Democrats for the past several years) for families making less than $250,000 a year, but do away with cuts for those making more than $250,000.
McCain’s approach is consistent with the economic blueprint implemented under President Reagan; keep taxes low for all Americans, even those at the top. As such, McCain would retain all the Bush tax cuts (including those affecting families making more than $250,000) and would reduce rates for corporations.
Which is the better plan?
To answer this question, one must address what is wrong with the economy. Interest rates are at historic lows, inflation is relatively low, the stock market is under-performing historical averages, the financial sector seems in disarray and the jobless rate is up. So what does it take to stabilize and stimulate the market and promote job growth?
Answer: capital.
It is what companies from AIG and Freddie Mac to the small manufacturer on Main Street desperately need.
While anyone at any income level may risk capital in a business (which creates jobs), those with the greatest ability and propensity to do so typically make more than $250,000.
Any increase in taxes on those people will directly and immediately reduce their capacity to invest and create jobs.
Obama has said many times that he would roll back the Bush tax cuts (which would mean the top rate would be increased to 39.6%) and remove the cap from Social Security (which could mean that there would be another 12.4% tax).
All told, for top earners, this would mean that the federal taxes would be in excess of 50%,which means a lot less capital available for private job creation.
While there is limited popular appeal to allowing the wealthy to retain the benefits of tax cuts, the track record for job creation cannot be underscored.
Since the Reagan tax cuts were implemented (setting the top rate at 28%) to today (where the top rate is 35%), the U.S. has gone through a period of unprecedented job creation.
So why would Obama want to throw caution to the wind to change this proven successful policy? Or, does he believe that his “bottom-up” approach would somehow stimulate the middle class to invest or spend their money in a manner which would more efficiently create jobs?
Obama inadvertently hinted at the answers to these questions on a recent “This Week” interview. When asked about increasing taxes on the wealthy if we are in a recession, he said, “I think we’ve got to take a look and
see where the economy is. It’s weak right now.”
From this small reflection, it would seem that Obama himself is now coming to understand that taxing the wealthy during a poor economy (even under the guise of a middle-class tax cut) will or could have a negative impact on job creation.
Accepting this, one must ask, under what circumstance could a tax increase ever have a positive effect on job creation?
Simple economics would suggest that reducing the capital of those who will likely invest will not create jobs,and will not help the economy.
McCain’s adopted principle of keeping taxes low for all Americans, even those at the top, may seem like the same old tired Republican platform, but it works.
Milner is managing partner of Newport Beach accounting firm Squar, Milner, Peterson, Miranda & Williamson LLP.
