The Connection Between High Taxes and Stagnant Wages

The Connection Between High Taxes and Stagnant Wages

By Stephen Mooreon Sat, 7 Feb 2015

President Obama has wisely abandoned his lead-filled trial balloon of taxing college savings plans. Congressional offices were deluged over the last week with indignant calls from voters on this middle-class bait-and-switch scheme and finally Democrats caved. Good riddance.

But the worst Obama ideas on taxes are directed at investors, entrepreneurs and risk-takers. These Obama investment tax hikes wouldn’t just harm wealthy investors, but American workers.

Obama proposes raising capital gains taxes and dividend taxes to 28 percent. He also wants to impose a new capital gains tax on inherited wealth — on top of the existing death tax of 40 percent.

This isn’t Obama’s first assault on investment income. When Mr. Obama entered office the capital gains and dividend tax was 15 percent. Then he raised it to 20 percent and then he added a 3.8 percent investment surtax, bringing the rate to 23.8 percent. The tax rose by more than 50 percent.

If the president has his way with his new proposals, the tax on investment income will be nearly twice as high when he leaves office as when he entered office. Take that, Warren Buffett, and all you greedy Wall Street hedge fund managers.

These taxes are sold under the rubric of income redistribution — and are reminiscent the famous 2008 interchange between Barack Obama and ABC’s Charlie Gibson during a presidential debate that went like this:

Gibson: “In each instance, when the [capital gains tax] rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

“So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?”

Obama: “Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.”

So it is “fair” to raise a tax even if it loses money.

The people who have gotten whacked by this tax are wage earners. Here’s why: When you raise the tax on investment, you get less investment. When businesses invest less, fewer workers are hired, and existing workers have less machinery, technology, computers and equipment to work with. This means they can’t be as productive on the job and their wages stagnate.

Incomes rose in the 1980s and 1990s when investment taxes fell under Presidents Reagan and Clinton. Wages have stagnated under Obama as taxes have risen on capital.

The nearly flat growth in middle incomes is, in part, a result of the higher taxes on the rich.

A landmark study on this topic by economist Kevin Hassett of the American Enterprise Institute looked at business tax rates and wages around the world. He found that business taxes were inversely related to average wages. This is, in part, because capital flees from places where tax rates are rising.

Even worse is the increase in taxes Obama plans on estates. The Obama plan would eliminate what is called “step-up basis at death” on capital gains taxation. Under current law, at the time of a parent’s or grandparent’s death, the increase in the valuation of an asset from when it was originally purchased is not taxed. This is to offset the effects of the estate tax. Obama’s plan would tax estates and impose the regular capital gains tax on inherited assets — a business, property or stocks. And he would raise the capital gains tax to 28 percent.

This could bring the effective death tax rate in the United States to about 57 percent. That’s nearly the highest in the world.

Under the Obama plan, only the first $100,000 of an asset’s increased valuation would be tax-free for an individual ($200,000 for a couple). So instead of a $5 million estate tax exemption, many middle-class families would get hit with taxes on inherited wealth.

The evidence is clear that the effect of raising death taxes is to reduce savings and cause the dissolution of family-owned businesses. Even Obama’s former chief economic adviser, Larry Summers, has written on the negative effects of death taxes on national savings.

A 2012 Joint Economic Committee study found that “the estate tax has reduced the amount of capital stock in the U.S. economy by roughly $1.1 trillion since its introduction as a permanent tax in 1916.” It also concluded that the tax “is an overwhelming cause of the dissolution of family businesses. The estate tax is a significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities.”

The point here is fairly simple: When businesses are healthy, productive and expanding, wages rise. As my old boss, Dick Armey, former House majority leader, always put it: “Liberals love jobs, but they hate employees.” Alas, you can’t have one without the other.

About two-thirds of the evil rich that Obama is hell-bent on soaking with higher taxes own, operate or invest in small businesses. The sad irony of his presidency, is that his agenda of greed and envy is so all-consuming and even maniacal that he has only managed to take down the middle class.

The lesson for Republicans is that tax reform that is pro-business and pro-investment is also pro-worker and pro-wages.

Originally appeared in the Washington Times.

The post The Connection Between High Taxes and Stagnant Wages appeared first on Daily Signal.