A Taxing Situation

The Heritage Foundation takes a look at what Obama promises for taxes should he be elected and what that means:

Obama’s tax plan has two major components. First, he promises to end the Bush tax cuts, allowing the top two tax rates to return to 36% and 39.6%. Second, he promises to end the Social Security payroll tax cap for incomes above $250,000. Individuals making more than $250,000, therefore, would face a 15.65% tax rate from payroll taxes in addition to a top income tax rate of 39.6% for a combined tax rate over 56%. Individuals living in cities or states with high taxes such as New York City or California would have tax rates approaching 70%, levels not seen since Jimmy Carter was in office.

This from a man who claims to want to ensure that he puts policies in place to help the economy. Instead, higher taxes, especially in the range being talked about here, have three effects.

One – tax avoidance. People effected by high taxes are going to try every legal means, such as tax shelters, to avoid paying taxes on their earnings.

These gimmicks both reduce investment and economic growth in an attempt to avoid punitive taxation. Some individuals will attempt to transfer their compensation from wages to capital gains since capital gains would only be taxed at 25%. Others might try to incorporate so they could pay business taxes instead of income taxes. All of these schemes divert resources away from wealth creation and to lawyers and accountants who implement these schemes.

Two – Income flight. Money and capital will be moved to overseas location where it is taxed at a much lower rate.

Visiting Britain recently, French President Nicols Sarkozy remarked that France’s high taxes had driven so many French to London that it had become the seventh-largest French city. Obama-sized tax rates would drive many creative Americans to Canada and London as well.

Or Ireland. Capital is going to seek a friendly tax climate for investment.

Three – Unemployment. When investment slows, the economy slows. And when the economy slows, the fastest way to effect the bottom line is to reduce headcount.

Currently only six of the top 30 industrial nations have combined local and national tax rates above 55%. The average unemployment rate rate for those countries is 7.35%. Under Obama’s plan, the top marginal tax rate would exceed 60%, which means only Hungary would have a more punitive tax rate. Hungary’s 2006 unemployment rate was 7.5%.

Couple that plan with the Obama plan to impose “windfall taxes” on the oil companies (for which the consumer will pay at the pump), biofuel mandates (for which the consumer will pay higher food prices) and and a carbon tax (for which the consumer will pay as well) and you have all the makings of an economic disaster.

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