Thursday, July 16, 2009

To Sur, With Love

As part of the gargantuan (1,000-page-plus) health care "reform" package introduced by members of the Democratic majority in Congress, the Obama administration proposes to raise taxes through a "surtax" on Americans who earn the most money.

The Washington Post explained this "soak the rich" policy in a front-page article on July 15:

The surtax would start at 1 percent and rise to 5.4 percent on income exceeding $1 million. Combined with the expiration next year of tax cuts enacted during the Bush administration, the surtax would drive the top federal tax rate to 45 percent, the highest level since lawmakers rewrote the tax code in 1986.
The Washington Times, for its part, points out that this raises U.S. marginal tax rates to their highest levels since the 1980s:
A new surtax of 5.4 percent in the health care bill, which would apply to married couples' income above $1 million, would bring the top federal income tax rate to 45 percent.

After consideration of state and local income taxes and the Medicare payroll tax, which applies to all wage and salary income, taxpayers in 39 states would face a top marginal income tax rate of more than 50 percent, according to a study by the Tax Foundation, a nonprofit tax research group based in the District.

"That means government would be taking more than half of every additional dollar from high-income taxpayers," said Tax Foundation President Scott Hodge. "The lowest tax rate would be 47 percent - and that's in the nine states that don't tax wages."

Businesses say the surtax would hurt the economy.

"The intention of this plan is to tax high-income households, but the real victims would be America's small-business owners," said Thomas Donohue, president of the U.S. Chamber of Commerce. "Placing a big tax burden on the small-business community would rob them of the resources they need to create the jobs that will lead us out of the recession."
President Obama would be wise to look to history to see what happened the last time a president made a surtax the centerpiece of his economic program. (Some might object that this is a "health care" program. That's true, up to a point. The fact that the bill has been referred to the Finance Committee in the House suggests that this is really a revenue bill.)

In Yanek Mieczkowski's 2005 book, Gerald Ford and the Challenges of the 1970s, the Dowling College historian relates what happened when Ford proposed a 5 percent surtax on all incomes above $15,000 (more than it sounds like; remember, these were 1974 dollars) in his first major economic legislative package:
As what he termed "the acid test of our joint determination to whip inflation in America," Ford pronounced the cornerstone of his new economic program, a one-year, 5 percent surcharge on corporate and personal incomes. The surtax was directed at individuals with yearly earnings of $15,000 or more for married taxpayers and $7,500 for the unmarried. (Taxpayers would have to figure out what they normally owed the government, then add the 5 percent surtax to it.) The advantages of the surtax were that it would be mildly progressive, since the rich would pay more, and temporary, lasting only the calendar year 1975. Nor was it onerous. For example, a single person earning $15,000 would pay a federal income tax of $2,549; the surcharge would add $78. (p. 121)
Despite its modest appearance, Ford's proposal was met with strong opposition, especially from the Democrats who held a majority in Congress (a majority that would grow substantially after the midterm elections a few weeks after his proposal was announced). Republicans were not too fond of it, either.
Ford took a political risk by proposing a surtax less than a month before congressional elections. Unveiling a tax increase at such a time was like unleashing a skunk at a picnic; representatives and senators ran in the opposite direction, refusing to embrace or even come close to it. Officeholders facing difficult reelection battles, such as GOP senators Bob Dole of Kansas and Marlow Cook of Kentucky, deserted their president rather than support the proposal....

The program itself was a political bomb. The jumble of proposals gave the whole thing an eclectic feel, and the centerpiece -- a tax increase -- fell flat. One poll showed that Americans opposed the surtax, 58 to 34 percent. Members of Congress resisted it. Just two days after the speech, William Baroody warned Ford that it was "in serious trouble on the Hill and very unpopular politically" and that Congress was in no mood to reduce spending. Two weeks before the election [William] Seidman publicly acknowledged that the surtax faced an uphill struggle on Capitol Hill and called its prospects "uncertain." The overwhelming Republican repudiation in the ensuing elections turned "uncertain" to "doomed." Ford's policy making was off to a rocky start. (p. 124; footnotes omitted)
In one of the more significant parenthetical partial paragraphs of any work of recent history, however, Mieczkowski writes:
(One economist's skepticism about the surtax generated what later became a mainstay of Ronald Reagan's "supply-side" economics. Arthur Laffer doubted that the 5 percent surtax would generate much revenue, and while dining at a restaurant with Ford administration members Don Rumsfeld and Dick Cheney, he drew a graph on a napkin to illustrate his belief that tax cuts -- rather than increases -- would raise more revenue because of increased business activity. His illustration became known as the "Laffer Curve.") (p. 122)
Apparently other economists caught on, even if they hadn't seen the napkin. Yanek Mieczkowski writes on page 130:
By November, many economists, realizing that Ford had miscalculated, urged him to drop the surtax proposal and switch his focus to fighting the recession. The president stuck by the surtax and still urged budget cuts.
In the end, the surtax proposal crashed and burned. Mieczkowski notes on page 131:
A political science axiom says that "the president proposes, Congress disposes." Congress certainly disposed of Ford's surtax, and quickly. Although he developed a fiscally balanced program incorporating many recommendations from the economic summit conferences, it was also like a multipronged barb that Congress could not swallow. And it soon became incongruous. The deteriorating economy, coupled with the inherent unpopularity of a tax increase, doomed Ford's first major economic initiative. But that failure was fortunate; as events played out, a surtax would have aggravated the downturn. (emphasis added)
History teaches us, and not just in this example from the mid-1970s, that raising taxes during a recession is a bad idea.

Barack Obama and congressional Democrats have not absorbed this lesson of history and economics. Should they succeed in raising taxes to finance their ambitious program to socialize medicine, they -- or, rather, we -- will live to regret it.

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