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Congressman Tom McClintock

Representing the 4th District of California

Tax Time

March 12, 2009

House Chamber, Washington, D.C.  March 12, 2009.  Mr. Speaker:  Many people were quite relieved when President Obama promised to reduce taxes on 95 percent of Americans.

Last week, the President introduced his new budget that depends on a staggering tax increase of $1.4 trillion over the next ten years.  If that fell on all of us, it would come to nearly $15,000 on an average family of four – or $1,500 per year out of that family’s paychecks.
So what a relief to hear the President’s assurances that it’s only going to be a tax on the rich.

 Except, it’s not.  As we begin dissecting the President’s new taxes, it’s becoming crystal clear that they actually squarely hit the middle class – working families who are struggling to make ends meet in the worst economy in a generation.

 Let me walk you through the reasons that the President’s new taxes are something that every middle class family should fear.

 There are about $650 billion of direct tax increases, including a boost in the income tax to nearly 40 percent.  That’s the part that the President says will only be on the very wealthy, which he defines as people making $125,000 a year or couples making $250,000.

 But when you scratch the surface, you learn that more than half of these folks aren’t folks at all – they’re small businesses.  So if you work for or own a small business, chances are that this tax is for you.

 The rest is coming from increases in business taxes either as direct taxes or as “cap and tax” fees for carbon dioxide emissions.   Cap and tax is a huge levy on every business that emits carbon dioxide – which means construction,  agriculture, cargo transportation, energy production, manufacturing, distilling, to name a few.

 Is that anything for middle class families to worry about?  You bet it is.

You see, businesses don’t pay business taxes.  There are only three possible ways that a business tax can be paid: it is paid by us as consumers through higher prices, by us as employees through lower wages and by us as investors through lower earnings – mainly what’s left of our 401(k)’s.

 There is simply no other way a business tax can be paid.

 The income tax deduction for charitable contributions is being curtailed for upper income taxpayers upon whom charities rely for the vast bulk of their donations every year.  That means a lot less charitable contributions and a lot more demand for government services.

 At just the moment when investment is desperately needed to create new jobs, the President proposes hiking the capital gains tax.  That means a lot less investment. 

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 charitable contributions.  If you tax investments you get less investment.  If you tax energy production you get less energy production.

So just at the time when we need more productivity, more charity, more investment and more energy, the Obama administration proposes a massive tax increase that they have the gall to tell us will stimulate the economy.

These taxes will hammer every American either directly or indirectly.  At exactly the time when we should be reducing burdens on the economy, this administration wants to increase them.

If the President wants to raise taxes because the government is out of money – what makes him think the American people are flush with cash?

This is exactly the mistake that Herbert Hoover made in responding to the recession of 1929: he dramatically raised income taxes, import taxes and spending.  And 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. 

California has again ignored that warning and is set to impose the biggest state tax increase in the history of the nation on April 1st.

That’s a $13 billion tax increase for California – proportionally somewhat smaller than the President’s taxes but in the same ballpark.  I suspect that by the time the Obama budget with all of its taxes come up for a vote, California will have become a poster child for what not to do.

And maybe by then the Administration and the majority in Congress will figure out that raising taxes in a recession is not exactly the smartest thing that we could be doing.