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Congressman Tom McClintock

Representing the 4th District of California

This Tax is For You

March 25, 2009

By Tom McClintock  When President Obama introduced his new budget, it was quite a relief to hear that its $1.9 trillion in new taxes would only fall on businesses and the “very wealthy.”  If they were to fall on the rest of us, they would take nearly $2,500 per year out of the paycheck of an average family of four.
Unfortunately, the old adage, “when it sounds too good to be true, it is,” applies in this case.  As the days go by, it is becoming clear that the President has aimed his new taxes squarely at America’s middle class – working families who are struggling to make ends meet in the worst economy in a generation.
 There are two components of the taxes, and both of them are bad news to middle-class families.
 First, the President plans to raise $950 billion over the next decade by dramatically increasing upper-income tax brackets.  He assures us that unless we’re among that very small group of very wealthy folks, there’s nothing for us to worry about.
 Unfortunately, it turns out that more than half of those very wealthy folks aren’t folks and aren’t wealthy -- they’re small businesses, many of which are struggling to keep their doors open.  If you work for, or own, a small business, chances are that this tax is for you.
 The second component of the historic tax hike is in the form of business taxes, including at least a $650 billion tax increase – and probably quite a bit more – under the guise of “cap and trade.”  Using this “bold new plan,” any business that produces carbon dioxide (that is, energy production, agriculture, distilling, baking, cement production, construction, cargo and passenger transportation, automobile manufacturing – get the picture?) must pay the government for a limited number of licenses to remain in business.
 Is that anything for middle class families to worry about?  Of course not, as long as they live in Ted Kaczynski’s old neighborhood.
The problem for the rest of us is that businesses don’t pay business taxes.  Business taxes can only be paid by three groups, and they’re all us.  We pay them as consumers through higher prices, as employees through lower wages and as investors through lower earnings – mainly from what’s left of our 401(k)’s.
 The President also proposes curtailing charitable contributions for upper income taxpayers upon whom charities depend for the vast bulk of their donations.  That means a lot less charitable contributions and a lot more demand for government services.
 At just the moment when the economy desperately needs new investment to create jobs, the President proposes hiking the capital gains tax.  That means a lot less investment and a lot less job creation. 
This is not a complicated principle.  If you tax something, you get less of it.  If you tax productivity, you get less productivity.  If you tax charitable contributions, you get less charity.  If you tax investment, you get fewer jobs.  If you tax energy production, you get less energy.
This is exactly the mistake that Herbert Hoover made in responding to the recession of 1929: he dramatically raised income taxes, business taxes and spending.  By doing so, he turned the recession of 1929 into the depression of the 1930’s.
Adam Smith, the father of modern economics, pointed out that a government that raises taxes in response to a recession makes the same mistake as a shopkeeper who raises prices in response to a sales slump. 
Perhaps there is a glimmer of hope.  California has just imposed the biggest state tax increase in the history of the nation, effective April 1st.
That’s a $13 billion tax hike for California – proportionally somewhat smaller than the President’s taxes but in the same ballpark.  By the time the Obama budget with all of its taxes comes up for a vote, California will have become a poster child for what not to do.
Maybe by then the President and his majority in Congress will figure out that raising taxes in a recession is the mother of all bad economic ideas.
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