Obama’s Trickle-Up Economics

He can hold back the waters and heal the planet. And now Barack Obama can apparently defy gravity, rewrite economics, and suspend the law of unintended consequences. That’s at least what I gather from the Obama campaign ad currently running in my home state of Ohio where he promises tax breaks for everyone except the “rich.”

So who exactly is going to pay for the $220 billion in new spending that Obama proposes if he is elected? Funny you should ask, because inevitably you will.

Contrary to their claims, these new programs proposed by Obama-Biden can’t possibly be funded by a tax solely on the rich. Taxes that only fall on the rich are as mythical as Bigfoot and Atlantis. They already know that their tax increases are going to have to dig pretty deep into the middle class, but they will float this phony campaign promise as long as enough people are willing to believe it and get them elected.

And how exactly will the Obama-Biden campaign’s “eat-the-rich” tax rhetoric play in the heartland when they hear about the $28,500 per plate fundraising dinner in Beverly Hills this week with the Hollywood elite (complete with the obligatory Barbara Streisand concert)? About as well as the middle class will take getting the bill for the Fannie Mac/Freddie Mac bailout. In fact, the rich seem to be doing their fair share of eating the rest of us.

Economists have long known that taxes targeted solely on the rich rarely strike their intended target for a variety of reasons. For one, when the rich begin to feel the tax bite they simply readjust their income to offset tax increases. They can do this by deferring income or decreasing the amount they work. Obviously, the rest of us don’t have these options.

For any increased taxes that the rich do end up paying, they pass those off to the middle class who are their employees (through pay cuts and layoffs) and customers (through price increases). Thus, tax increases on the rich actually result in stealth tax increases and layoffs that land squarely on the middle class and the poor. Do you have anyone to pass your tax increases off to? Didn’t think so. And when prices of everyday goods begin to increase, the result is inflation, meaning that the money you have today is worth less tomorrow. For high inflation and high unemployment, think Jimmy Carter.

Finally, when tax revenues from the rich begin to decline, Congress begins to look for other sources of revenue to tap into because they have spent the money before the first dollar of new taxes comes in. And there will never be a discussion about cutting programs, rolling back benefits, or slowing spending, especially with Democrats in control of both houses of Congress. The result is that when the rich begin to shift their income to reduce their tax liability and tax revenues begin to slow, Congress must go back to the tax base of last resort — the middle class. Then the tax increases won’t be so stealthy.

Before believing Obama’s campaign ads promising you how he and the Democrat-controlled Congress only want to tax the rich, remember that earlier this year Democrats — including Obama and Biden — were pushing a budget proposal that would have increased taxes for individuals making $31,850 and couples making $63,700 — hardly the rich.

With that in mind, do you really trust Obama and his Democratic pals in Congress when they say that they have honestly given up on tax increases for the middle class? And let us not forget that Obama has stated repeatedly during the campaign that he intends to raise the capital gains tax, which sounds like something that will only affect the rich until you want to sell your house.

Meanwhile, the Bush tax cuts have saved middle-class families nearly $2,000 annually — tax cuts that McCain-Palin supports extending, but Obama-Biden intends to roll back in 2010 if they are elected.

We only need to look at the last Democrat elected to the presidency as a cautionary tale about believing their trickle-up tax promises. Bill Clinton also promised middle-class voters that he would cut taxes, and in fact he won the 1992 election by chastising President George H.W. Bush for violation of his “no new taxes” pledge. Once safely in office, however, Clinton passed the largest tax increase in the history of mankind (the deciding vote in the Senate cast by Vice President Al Gore, supported by Joe Biden) and began hiking gas taxes (a tax increase that not a single Republican in Congress voted for). And to make it even worse, Clinton imposed his tax increases retroactively, hitting middle-class families even harder.

In the end, no one escapes tax increases. But when it comes to tax increases targeted at the rich, invariably the middle class and the poor end up holding the bag. Another Harvard man, President John Kennedy, understood this and enacted tax cuts which spurred economic growth and increased tax revenues. “A rising tide lifts all boats,” Kennedy repeatedly said. However, this is heresy for the Democratic Party today.

Obama’s trickle-up tax increases are a fairy tale that can only be told before the election. Once elected as president, Obama will have to quickly break the bad news to the American people that he was only kidding about his gravity-defying tax increases only on the rich. This is especially true after the bailout announcements this past week (Fannie Mae, Freddie Mac, AIG, and no doubt more coming taxpayers’ way).  And those tax cuts he is currently promising middle-class voters in battleground states, like Ohio, Pennsylvania, Michigan, and Iowa? Well, you can expect your tax rebate check from his new Treasury secretary, Bigfoot.