Cliff deal leaves some of us hanging

Charlie Wilson
Staff Columnist

The recent fiscal-cliff deal signed into law by President Obama prevents the economy from immediately spiraling off the government-created cliff, but does nothing to solve our country’s underlying fiscal imbalances. The deal imposes virtually no spending cuts – just higher taxes to the tune of $620 billion over the next decade.

With a $16.4 trillion national debt and trillion dollar deficits as far as the eye can see, real spending cuts, such as curtailing entitlements, have to be part of any serious debt reduction package. Unfortunately, the deal brought only punitive tax hikes on the investor class. The amount of projected revenue from the higher tax rates is really a rounding error in the scheme of things.

Besides bringing in little additional revenue to lower forecasted deficits, the higher marginal taxes on work, savings, and investments for the so-called rich guarantee the economy will perform even worse over the coming years.

For incomes reaching the $400,000 threshold, the new tax code raises the top marginal rate on income to 39.6 percent from 35 percent and the dividends and capital gains rate to 20 percent from 15 percent.

A common argument on the left is that we are simply returning to the tax rates of the Clinton years, a period of economic prosperity, so the economy can manage.

Of course, the economy grew in the 1990s because of factors independent of tax rates that no longer apply to today, such as low oil prices, an Internet boom, the peace dividend as a result of the collapse of the Soviet Union and an overall slowdown in government spending, so that argument is invalid. Besides, Clinton cut the capital gains tax in 1997, whereas Obama has raised it twice.

In actuality, because the Affordable Care Act raises taxes by a trillion dollars over the next decade, successful earners face a larger tax bite today than when Clinton left office. For instance,  the Affordable Care Act includes a 3.8 percent Medicare surtax on all forms of income, bringing the top federal tax rate on capital gains and dividends to 23.8 percent, for a 57 percent increase in the rate. This surtax pushes the top tax on savings to a rate close to 45 percent. Obviously, elevated taxation on savings only worsens our already too-low savings rate.

On top of Obama’s anti-growth tax increases, many states, have joined the party by raising their rates to confiscatory levels, meaning the combined federal and state top tax rate exceeds 50 percent in some of the states. For example, a profitable venture in California now faces a marginal tax rate around 55 percent.

Extraordinarily high tax rates create a poor business climate that hampers the incentives of wealth creation. When calculating the after-tax return of a potential investment, investors include all levels of taxation. Holding all else constant, growth in income, output and innovation diminish when after tax returns fall since potential projects become less attractive to pursue.

A recent study by the Ernst and Young accounting firm confirmed that just the expiration of the Bush-era tax rates on the high-end would destroy 710,000 jobs and lower economic output by 1.3 percent. In other words, higher taxes designed to soak the wealthy would actually drown the bottom 98 percent as they face fewer opportunities in a smaller economy.

Once again, politicians have poured salt on a self-inflicted wound. The current higher tax tirade only worsens our economic troubles and allows legislatures to delay necessary spending cuts. As the economy continues to sputter into the New Year from a government-induced hangover, tax and spend politicians must own it.