Welfare state is large enough

By PAUL GESSING

ALBUQUERQUE, N.M. — Barack Obama promises “change,” but the real question American voters — particularly taxpayers — should be asking is whether Obama’s brand of change will improve our situation or worsen it.

When it comes to Americans’ pocketbooks, Obama has laid out a clear vision that calls for a bigger, more costly government. Unfortunately, at a time when economic growth is slowing at least partly as a result of misguided government policies such as ethanol subsidies, refusal to allow oil companies access to oil, federal encouragement of the housing bubble, and the costly Iraq War, taking an even bigger share for government is bound to only prolong our current slowdown.

So, what does Obama propose? To be sure, he does have a few tax cuts aimed at middle and low-income Americans sprinkled through his plan. His “Making Work Pay” credit would offset payroll taxes on the first $8,100 of earnings, generating savings of up to $500 per person or $1,000 per family. His campaign says that will eliminate income taxes for 10 million low-income Americans.

But we already have the Earned Income Tax Credit for low-income wage earners. The IRS estimates that nearly one-third of EITC payments — more than $10 billion annually — now are wasted in overpayments. Is it really wise to create an entire and complicated new credit that would be subject to the same abuses?

Obama’s small tax cuts will have a negligible impact on our economy because of their indirect and minimal impact on economically productive behavior. His tax hikes, however, are something else again and seem likely to have a significant, negative impact on our nation’s economic growth.

Bush’s tax cuts

The centerpiece of Obama’s plan is to end the Bush tax cuts and allow the top two tax rates to return to 36 percent and 39.6 percent. He would also phase out personal exemptions and deductions for those with income in excess of $250,000.

Again, with an eye toward punishing those who have achieved economic success, Obama plans to end the Social Security payroll tax cap for those making more than $250,000. The cap is currently set at a more reasonable $102,000.

Under Obama’s plan, these individuals will face a tax rate of 15.65 percent from payroll taxes and the top income tax rate of 39.6 percent for a combined top rate of over 56 percent on each additional dollar earned.

In a single stroke, Obama’s massive payroll tax increase abandons any pretext of Social Security being “social insurance” as opposed to just another welfare program. It will massively expand government with almost no positive impact on Social Security’s solvency.

Obama’s plan would keep Social Security in the black for only three more years. Annual deficits would hit in 2020, instead of 2017, and by the 2030s the system would still run an annual deficit exceeding $150 billion.

As if those proposals were not enough to weigh the American economy down, Obama plans to nearly double the top dividends and capital gains rate from the current 15 percent rate to as high as 28 percent. Indeed, while most tax cuts may result in slight revenue declines even as they spur economic growth, Bush’s dividend and capital gains tax cuts actually have increased federal revenues.

On the other hand, Obama pledges to follow President Bush in rapidly increasing the size and scope of the federal government. Bush has allowed the federal budget to grow from 18.4 percent to 20 percent of the nation’s GDP. President Clinton, on the other hand, oversaw a reduction of federal spending from 22.1 percent to 18.7 percent of the Gross Domestic Product.

Unfortunately for the American economy, the likelihood of massive government expansion under Obama means that the only important “change” will be in the mechanism by which our ever-expanding government is funded.

X Paul Gessing is the president of New Mexico’s Rio Grande Foundation, a tax-exempt research and educational organization. Distributed by McClatchy-Tribune Information Services.