The Difference Between 1993 and 2009

At the center of Senator Obama's tax policy argument is that by raising taxes on the top 5% of income earners, we are only returning to President Clinton's 1993 tax increases. Let's for a moment leave aside that Obama really is looking to raise taxes on social security (above incomes of $103,000) and on everyone's capital gains, regardless of income. Rather, the Obama argument goes that because we had a relative economic boom following the 1993 tax increase, it's perfectly safe to raise taxes in 2009 as well.

Wrong. There is a major difference between 1993 and 2009 that Obama and McCain alike are both failing to articulate. In 1993, the U.S. was one of the world's lowest-tax countries, with Europe mostly at much higher rates, and most of the Asian economies too underdeveloped to be alternatives for investments and businesses. Eastern Europe was under a cloud of uncertainty and instability following the rapid demise of The Soviet Union on Christmas Day 1991. The 1993 tax increase left the U.S. as the leading free-market economy, albeit at a smaller margin than before.

As we enter 2009, the U.S. position in the world is extremely different than it was 16 years earlier. We are no longer the low-tax beacon of the major industrialized world. Numerous countries in Western Europe, Eastern Europe, Asia and elsewhere now have lower capital gains taxes than the U.S. The same goes for top marginal income tax rates, where Albania is at 10%, Estonia 13% and Russia 17%, just to mention a few. Here in the U.S., the current top rate is 36% for Federal, and if you live in NYC or California, you probably pay very close to 50% all-in. Our 15% long-term capital gains tax can't compete with the 0% rates in many other countries, but don't forget that many capital gains taxes aren't long-term, at which point you will pay 36% or higher.

The effect of the current high-tax policies is becoming an increasing disaster. There has been no employment growth in places such as Silicon Valley in the last decade, because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. Have you noticed the lack of IPOs in the U.S. this year? For the first time in 30 years, there were no venture-backed IPOs. This has a significant impact to the standard of living here at home.

In this context, it is strange to listen to Senator McCain saying repeatedly that he wants to "Keep taxes low." Well, if taxes aren't low, why does he want to keep them? We have some of the world's highest capital gains and income taxes, so we are hemorrhaging investments and human capital to those places where they are not taxed as much.

So what is the 2009 recipe to strengthen the U.S. economy? Clearly McCain is wrong about "keeping taxes low" because they are already way too high. As for Obama, he proposes an outright train wreck in terms of forcing investors, businesses and high-wage earners abroad. Rather, we should once and for all abolish the capital gains tax – whether for short-term gains, or long-term. We should also become competitive with the fastest-growing economies in the world by cutting the top Federal rate to below Albania's 10% rate. Given that some U.S. states and local governments have combined rates of around 10%, it would be appropriate to abolish our Federal income tax altogether. This would stop the hemorrhaging of investments, businesses and talented individuals leaving our country.

What about the budget deficit, you say? Wouldn't abolishing the income tax and capital gains taxes reduce tax revenue? Of course it would. So the answer is to cut government spending correspondingly. The Federal budget now exceeds $3 trillion, or $10,000 per U.S. citizen, of which the Department of Defense is little over 20%. Big ticket items are Medicare, Medicaid and Social Security, for starters. Medicare and Medicaid in particular, are hugely inefficient and unnecessarily bureaucratic ways to induce people to over-consume health care services, and should be abolished in favor of lower taxes that would lead to a booming economy. The list goes on, but the Federal budget can be cut from over $3 billion to around $2 billion immediately, followed by another cut down to $1 trillion over time as Social Security payments dwindle in favor of a private 401(k)-style private system. The government can also raise funds by selling property, including land. After all, various agencies of the U.S. government is by far the largest property owner in the country, and could fill several years worth of budget gaps by auctioning off vast amounts of lands and buildings no longer necessary when we cut off the bureaucracy and the socialist apparatus currently consuming our tax dollars.

Comments

[BlueOkie:]

The problem is that everyone wants to cut the others programs. I'm sure there is spending program or two that effect you directly or indirectly. What will all the government employees do?

2008 Oct 12 10:36 AM

[raising4dau...:]

BlueOkie - you raise a good question "What will all the government employees do?", but the better question is "If we don't hack government spending dramatically, how can those of us in the private sector possibly continue to carry the weight of government piggies, er, employees on our backs."

The Bush administration re-introduced the era of Big Government, more specifically, Big, Inefficient, Ineffective, and Bloated Government. We don't need more spending, we need better deployment of smaller spending. We don't need more regulations, we need actual enforcement of existing regulations (hint to Hank Paulson, Christopher Cox, Barney Franks, and Chris Dodd).

T. Boone Pickens is fond of talking about the shift of wealth from the US to the oil producing countries. We need another T. Boone Pickens to talk about the shift of wealth from the wealth-producing sectors (manufacturing, distribution, mining, forestry, etc.) to the wealth-consuming sectors (government, education, non-profits, etc.).

The past week shows it dramatically. The piggies' retirements from defined benefit (pension) plans are guaranteed. Heck, they get pushed to the taxpayers if necessary. The rest of us fund our own plans through 401k's, and those haven't faired very well for the past decade, especially the last year.

2008 Oct 12 10:56 AM

[CLH:]

Beautifully written and totally true Anton. Keep writing.

Okie maybe the gov. workers will go out and get an honest job and quit sucking our blood.

2008 Oct 12 01:35 PM

[David in D:]

Anton- While I think your proposal makes limited sense economically, it would have disastorous effects socially and that is a major factor that you have not weighed. I have no idea where you fall on the wealth spectrum, but clearly you do not have an interest in creating a win-win for everyone. Until poverty is alleviated in America and until the working class has wages that are increasing ahead of inflation we cannot will not see a lasting economic recovery.

Frankly, your 10% income tax proposal and the elimination of the capital gains tax heavily favors those with wealth at the expense of the poor and working class. What exactly do you propose the single mother with two kids and working for $8 per hour do? Cutting her health care access certaily doesn't help her. Seriously, I would like to hear you address the "poor/working class" in America -- what is your proposal for them?

Finally, your "low tax" agenda will not have another political chance in America for at least a decade. Bush 43 completely discredited it by giving tax breaks to the elite while running up huge defiicts. Republicans, at the moment, have NO credibility as fiscal conservatives. Therefore, if we are going to run big deficits let's at least take care of our poplulance instead of bombing innocent countries and giving contracts to Haliburton to rebuild them.

2008 Oct 12 10:43 PM

[Moon Kil Woong:]

During a depression and deflation we are suppose to look more at increasing government spending not decreasing it since no one but the government will spend money. However, the fact we have tons of debt makes that hard. So guess what... we suffer just like a 3rd world country going through a World Bank austerity program.

2008 Oct 13 01:15 AM

[wdhalgren:]

Anton, I can see from your photo that you're still young and idealistic. I applaud your free market, small government ideals. Unfortunately, 30 years of left leaning news media have convinced Americans that government has the solutions to our problems. If we cut taxes, overall society might prosper in the long run, but there would be a wider wealth disparity between savers/investors and beneficiaries of the welfare state. Our media have determined that cannot be allowed, so we will continue to discourage investment by adversely skewing risk/return.

2008 Oct 13 06:59 AM

[2snazzy:]

You ignore two basic principles.

First, the #1 goal of government (any government) is to stay in power and maintain the status quo.

Second, the #2 goal of government is to GROW.

Cut federal spending from 3 Billion to 2 Billion? That's like saying we could avoid rush hour traffic if we all sprouted wings and flew ourselves where we wanted to go rather than driving.

The first thing we need to do is to change the constitution so that (a) each administration is for six years with NO reelection. This would mean that an administration would be focused on GOVERNING rather than getting REELECTED. Second, we need to adopt the British concept of being able to vote out an administration if we as a populace believe the current administration is no longer effective in managing our government as opposed to waiting four more years to vote that administration out when the next election rolls around. If we had to ability to have a "no confidence vote" in this nation, George W and his team would have been run out of office long ago and the expensive war and other fiscal policies that are driving us deeper into debt would have been stopped.

If the current system isn't working, why continue to dig a hole? It's time to go to a new system.

2008 Oct 13 10:40 AM

[Matt Blackman:]

Well done Anton. And then there is the problem with Obama's promise to raise corporate taxes and 'punish' US multinationals. The US is the only industrialized country that taxes based on citizenship instead of domicile and that has created a raft of headaches for US multinational corporations. His plan to scrap "tax breaks" that Congress has levied in an attempt to make them competitive will be very counterproductive to the ability of US corporations to compete.. but then few seem to care. For more on this see sfomag.com/article.asp...

2008 Oct 20 01:07 AM