How the president's call for tax hikes will shrink the economy and harm the middle class.
Bereft of first-term achievements, President Obama has reverted to the one campaign tactic that reliably energizes his partisan Democrat base: assailing the rich. The president’s latest proposal is to raise taxes on those earning over $250,000 by allowing Bush-era tax cuts to expire. This is not exactly new. By some estimates, this is the 25th time that Obama has proposed raising taxes on the “wealthy” – whose ranks include the 750,000 independent and small businesses that are taxed at individual income rates.
Pledging to soak the rich may gratify left-wing partisans, but it’s bad economic policy. Rich people may get rich by generating wealth for themselves, but in the process they generate prosperity for others. For instance, it is mainly the rich who start new businesses and invest in new enterprises. That in turn creates opportunities for others who are not rich. While it's fashionable on the left to disparage the idea that the wealthy are job creators, that is precisely what they are. In their book How Capitalism Can Save Us, authors Steve Forbes and Elizabeth Ames report: “Entrepreneurship and capital investments by rich people are responsible for businesses that created 1.4 million jobs annually over the last decade.” As it happens, that’s a far better record of job creation than the government spending programs favored by Obama.
One prime example of the rich creating jobs is private equity, which the Obama campaign is now busy demonizing due to Mitt Romney’s past involvement with equity firm Bain Capital. In the Democratic caricature, firms like Bain generate massive returns for their wealthy investors while harming average workers. In reality, these firms generate wealth across income levels. The Wall Street Journal reports that between 1991 and 2006, private equity firms world-wide created more than $430 billion in net value for investors. Those investors included not just rich people but universities, charitable organizations and pension plans that cover tens of millions of Americans. True, profits are the main goal of these firms. But it is indisputable that they also create jobs. One need only look at office-supply empire Staples, which benefited from an investment by Bain Capital to grow to 2,000 stores that employ some 90,000 people and generate nearly $25 billion in annual sales. Not bad for an alleged job-killing "vampire."
Even when they're not driving business success, the rich make a massive contribution to the economy with their spending. Liberals like economist Paul Krugman have long argued that the key to economic recovery is for the federal government to boost consumer spending, which comprises the largest share of the economy. What they don't acknowledge is that spending by the wealthy is now almost singlehandedly fueling the consumer economy. According to the Wall Street Journal, the top 5 percent of Americans by income now account for 37 percent of consumer spending. Given that tax increases will reduce the spending levels of the rich, it's not obvious why proponents of consumer spending as an economic remedy believe them to be a good idea.
Tax-hikes will also hinder another of the many contributions the rich make: their charitable activities. It's no coincidence that the leading charitable foundations in this country – including the Ford, Carnegie, Rockefeller and Gates foundations – were founded from the fortunes of rich capitalists. Not only that, but the rich contribute a disproportionate share of their income and time to charity relative to the rest of the population. Columnist Deroy Murdock notes that in 2008 the top 10 percent of taxpayers paid 42 percent of all charitable deductions, for a total of $72 billion that year alone. The rich also volunteer more than average Americans. In 2009, Murdock points out, 78.7 percent of wealthy people volunteered with charitable organizations, as compared with a national average of 26.8 percent. Still, that hasn't deterred class warfare scolds like the New York Times from grumbling that upper-income earners are stingy and suffer from a "compassion deficit."
Even if the rich didn’t make important and generous contributions to the social and economic order, there is presently no compelling justification for new taxes on the wealthy. After all, rich Americans already bear the overwhelming brunt of the tax burden. The top 1 percent pay nearly 37 percent of all federal income taxes. The top 10 percent pay nearly 70 percent of all federal income taxes. For all the populist outrage-peddling about secretaries paying more than their multi-millionaire bosses, the reality is that the 400 richest Americans pay almost as much in federal income taxes as do the 50 percent of taxpayers in the bottom of the income distribution. These tax receipts go a long way toward funding government programs, including those that benefit-low income Americans. It might be fitting if Obama occasionally acknowledged his debt to those who pick up the check for his spending. Instead, he wants to squeeze them even more.