How Obama's Soak-The-Rich Plan Will End Up Hurting Middle Class

How Obama's Soak-The-Rich Plan Will End Up Hurting Middle Class

By Jim Powell - March 5, 2009


President Obama has claimed that his budget goes after the rich who supposedly will pay the cost of his spending extravaganza. But it is already apparent that the rest of us will pay plenty.

Obama is continuing the crusade against offshore tax havens he began as an Illinois senator. He's targeting places like the Bahamas, Cayman Islands, Isle of Man, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands Antilles and Switzerland, which have low taxes. There are about 50 such tax havens globally.

It's wrong to think that a U.S. crackdown on offshore tax havens would primarily hit disgraced Wall Street high rollers who made fortunes peddling subprime securities. These tax havens are used by many of the biggest U.S.-based corporations to help minimize the massive tax liabilities imposed on multinational operations.

To the extent these corporations are able to minimize their tax liabilities -- along with other costs of doing business -- their profits and stock valuations are higher.

Shares of these corporations are in millions of individual retirement plans as well as the portfolios of colleges, universities, insurance companies, hospitals and charitable institutions.

Some of the corporations would be more adversely affected than others by Obama's effort to bar the use of offshore tax havens, thereby raising corporate taxes, undermining stock valuations -- and making it harder to hire people.

Why would Obama choose to attack stock valuations now, after the stock market has already lost about half its value during the past year? Why, when the country is in a serious recession, investment portfolios have been hammered, the banking sector is in turmoil, and unemployment rates are rising, would Obama make it harder for U.S.-based corporations to do business?

Obama's concern seems to be that corporations aren't paying their fair share. But corporations don't really pay taxes anyway. Corporate taxes are passed through to consumers like other costs of doing business -- factored into the price of goods and services.

Trying to suppress offshore tax havens means generating upward pressure on the prices Americans pay for food, gasoline, clothing, computers, pharmaceuticals and thousands of other products that affect our daily lives. Why would Obama do anything to make life harder for American consumers in already tough times?

Moreover, corporate taxes amount to double taxation. Profits are taxed at the corporate level, and they're taxed again when investors receive interest on corporate bonds, dividends on corporate stock, or when investors sell stock, bought with personal income previously taxed, that yields a capital gain.

The crusade against offshore tax havens is just one among many Obama initiatives that will have the effect of increasing business costs and reducing returns for investors.

His proposed budget includes $353.5 billion of tax increases for U.S. businesses. Many investors face a tripling of taxes. Other proposed policies would further increase the cost of doing business, such as "green" mandates.

A proposed "card-check" law is intended to revive compulsory unionism in the private sector and make it more expensive for employers to hire people. When something becomes more expensive, demand is likely to fall.

By reducing after-tax returns from investment, Obama will discourage investors from making their funds available. For all practical purposes, investors could go on strike as they did during the 1930s when a succession of soak-the-rich taxes made it hard for investors to estimate their risks and returns, and they remained on the sidelines. Without more capital, it's almost impossible to create more private sector jobs.

Obama's populist rhetoric suggests that he's only going after the super-rich. Yet reportedly half of individuals earning over $250,000 a year are small business owners. During the past 15 years, small businesses have been creating over 90% of net new jobs -- altogether, more than 20 million jobs. How smart is it for the heavy hand of government to come down on these employers?

Not very -- if the goal of these policies is economic recovery and prosperity.

Jim Powell, a Senior Fellow at the Cato Institute, is the author of FDR's Folly.

This article originally appeared at the Cato Institute and is reprinted with permission.

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