The $700 Billion Price Tag

This article was featured in The Bulletin (Philadelphia-area newspaper) on 9/19/10. You can read the newspaper version online here or catch the print column every other week.

During his recent speech in Ohio, President Obama made it clear his administration will soon raise taxes on those in the top marginal income tax bracket. While not surprising given the administration’s penchant for redistribution, the manner in which President Obama made his declaration brings cause for concern: “This isn’t to punish folks who are better off – it’s because we can’t afford the $700 billion price tag.” Not only will such tax-the-rich policy hamper U.S. economic growth, principally among small businesses, but the statement itself is a clear indictment of the president’s broader philosophical belief: Earned income is the Government’s, not the Peoples’.

Practically, the looming tax increase will hamper the already-struggling recovery. The wealthiest earners spend the most, especially on the margins. Their spending helps fuel demand, drive profits, and thus create jobs. This group also invests more, providing capital to companies seeking cash and driving long-term growth. But the debate over trickle-down economics has been well documented.

Perhaps more significant is the acute degree to which the tax hikes will damage small businesses. Small businesses comprise over 99% of all U.S. businesses, employing 70 million Americans, or half of the total private work force.  According to recent IRS data, an astonishing 48% of the net income of these businesses—sole proprietorships, partnerships and S corporations—went to those earning above $200,000. In other words, the tax hike will directly hit companies that drive a considerable portion of economic growth and job creation.

Significantly, a pair of studies published by economists at the National Bureau of Economic Research show exceptionally high responsiveness of sole proprietors’ business activity to tax rates. When applied to President Obama’s proposed hike, the study shows a projected 7% drop in total gross taxable revenue. Adding to this data is a study from R. Glenn Hubbard of Columbia University showing that as the progressivity of the tax code increases, entrepreneurs are further discouraged from starting new businesses. Finally, when the National Federation of Independent Business recently asked small business owners to list the most important problem they faced, a full 20% cited taxes, making it the second most named concern behind only weak sales. Perhaps this is why just 21% of economists recently surveyed by the Wall Street Journal favored the president’s decision to raise taxes on the wealthiest earners.

Beyond economic implications, it is odd that the administration expresses concern for a potential $700 billion revenue loss from extending tax cuts for top earners, but is seemingly unconcerned about the revenue loss of $2 trillion from extending tax cuts for the rest of the population. Moreover, such concern was conspicuously absent when passing the two largest fiscal budgets in U.S. history, the Cash for Clunkers program, mortgage and corporate bailouts, the wasted $800 billion stimulus, the $1 trillion healthcare bill, and massive increases in social welfare programs. With the deficit having grown 300% under its watch, the administration ought to have a difficult time claiming fiscal restraint as its driving motivation.

So, in absence of fiscal responsibility and with the economic data so exceptionally clear—falling small business revenue; increased job loss; discouraged entrepreneurs; less consumer spending—why would the administration champion such a policy? Because it believes income belongs to the government, not the people. To them, letting the tax cuts expire would be like turning away a lottery ticket.

The progressive movement, unveiled over the past 18 months, believes firmly that the potential success of the collective trumps the rights of the individual. A guided economy, redistributive tax policy, and a slew of federally dictated entitlement programs are the means by which progressives seek to accomplish an elusive social utopia. As Frank J. Goodnow, one of the founders of modern progressivism once noted, “Social expediency, rather than natural right, is thus to determine the sphere of individual freedom of action.” When the collective comes before the individual, when liberty is trumped by statism, government claims the product of your labor. If, in its great beneficence Government offers you the gift of 60% of your earned income, you ought to be thankful. Or so the story goes.

The Founding Fathers saw things quite differently. They established a Constitutionally-constrained government, centered on the idea that government should exist only where necessary. Property, earned income, and the product of private labor were the peoples’ right to keep. The people, after all, had worked for it. Government confiscation of earned wealth, they felt, should only take place with the utmost discretion and for limited, enumerated purposes.

With such clear economic implications and a marked departure from America’s original values, the Founders might have issued a clear retort to the president’s statement: “No, Mr. President, the People can’t afford the $700 billion price tag.”

-Matt Benchener is Supervisor of Newtown Township and Found of TruPolitics.net