Economists From Left and Right Disagree Over Potential Impact of Obama’s Tax Increases

November 7, 2008 - 9:40 PM
Economists on the left and right disagree on the effect that President-elect Obama's plan to raise taxes on higher income brackets will have on economic growth and job creation.

President-elect Barack Obama, speaking on his tax plan as the Democratic nominee

(CNSNews.com) – At his first news conference as president-elect on Friday, Barack Obama ducked the issue of whether he intends to follow through on promises to seek income tax increases for those making $200,000 or over.

Obama was asked by a reporter, “Mr. President-elect, do you still intend to seek income tax increases for upper-income Americans? And if so, should these Americans expect to pay higher taxes in 2009?”

He responded: “(M)y tax plan represented a net tax cut. It provided for substantial middle-class tax cuts; 95 percent of working Americans would receive them.

“It also provided for cuts in capital gains for small businesses, additional tax credits. All of it is designed for job growth,” Obama said.
“My priority is going to be, how do we grow the economy? How do we create more jobs? I think that the plan that we've put forward is the right one, but, obviously, over the next several weeks and months, we're going to be continuing to take a look at the data and see what's taking place in the economy as a whole.

“But, understand, the goal of my plan is to provide tax relief to families that are struggling, but also to boost the capacity of the economy to grow from the bottom up.

Economists, meanwhile, are divided on whether or not Obama’s tax plan – which would raise some income and business taxes – will help or hurt plans for economic recovery.

The Obama tax plan proposes to raise the top two income tax brackets to 36 percent and 39.5 percent respectively. His plan also calls for raising the capital gains tax on people making over $200,000 to 20 percent and raising the tax on stock dividends to 20 percent.

Obama also plans to close many business tax loopholes and tax breaks, effectively raising tax rates on American businesses.

Some experts say these tax increases would hinder economic recovery by making investment less attractive -- investment that would boost the flagging stock market and create jobs. 

“There’s really no dispute that it’s harmful to the economy,” said economist J.D. Foster, Ph.D., senior fellow at the conservative-leaning Heritage Foundation. “The debate really is just a question of degree.

“It’s harmful to the economy, some people think it hurts more and some people think it hurts less.  If you tax productive activity, and lower the (financial) return for productive activity, you get less activity. That means less work effort, less investment, less entrepreneurial activity, (and) fewer jobs being created as a result,” Foster told CNSNews.com.

However, Dean Baker, co-founder of the liberal-leaning Center for Economic and Policy Research disagreed, saying that Obama’s tax increases wouldn’t have a detrimental impact on the economy at all.

“There’s very little evidence of any impact on investment,” Baker said. “The relationship between capital gains taxes and investment is basically nonexistent. It’s very hard to tell the story that this would hurt investment.”

“We’ve had much higher capital gains tax rates through most of our history, and we’ve had much higher rates of investment,” he said. “We had much higher capital gains tax rates through the fifties, sixties, seventies, and even the eighties, through most of that period we had much, much higher investment.”

But other economists disputed Baker, saying that higher taxes only reward unproductive behavior by redistributing money from “successful, prudent” people to others, who are “imprudent” and “unsuccessful.”

“It would be a disastrous thing to do,” Lew Rockwell, president of the Ludwig von Mises Institute, told CNSNews.com.

“It’s always a very bad thing to take resources out of the productive, private sector and send them away to be wasted and frittered away in Washington. Especially in a very serious recession, it’s the exact opposite of what you want to do.”

“Even (liberal economist) John Maynard Keynes thought that raising taxes at such a time was a bad mistake,” Rockwell added.

Rockwell said that the only real beneficiary of raising taxes on businesses and individuals was government -- and those who benefit from government largesse, at the expense of everyone else.

“It makes the government better off. It makes the people who are living off the government, whether it’s GM or Goldman Sachs or all these other people getting the payoffs, they’ll be better off, but the rest of us will be worse off.” 
 
Economist Desmond Lachman, a former top official at the International Monetary Fund (IMF) and resident fellow at the American Enterprise Institute, struck a more measured tone, saying that the crucial issue is timing, because the current financial crisis trumps any other plans Obama might have.
 
“The long-term objectives he might have had are going to have to go on the back burner until he figures out how to get the economy stabilized,” he said. “The attention is now going to go from ‘do we deliver campaign promises on day one’ to ‘what is it that we need to do to stabilize the economy’.”
 
“They (will) go through a discussion and figure out that raising capital gains taxes and dividends (taxes) could be bad for the stock market at this particular juncture,” Lachman said, “(especially) when it looks like your stock market is in free fall, you don’t want to kick off the presidency by antagonizing a Wall Street that would be very important in getting things back on track.”