Thursday, October 23, 2008

Neither McCain Nor Obama Understand Taxes

Barack Obama has been on the campaign trail reminding voters that John McCain opposed the tax cuts of George Bush because it was an "irresponsible" policy. Furthermore, McCain is now only supporting the idea of cutting taxes because he is trying to get elected, Obama argues. Looking at the history of McCain's views, Obama is probably right.

Neither McCain nor Obama understand tax policy. You can see this in several areas:
  • McCain opposed the Bush cuts because spending was out of control at that time. The reality is, the Bush tax cuts generated a massive amount of revenue (arguably far more than could have been garnered through increased taxes). The reason for this is simple and is seen every day at Walmart. Walmart makes less per product of virtually any company in the world. They shave their profit margins to extremely low level in order to make sure consumers buy as much as possible. In the same way, the lower the taxes on wealth creators (be it businesses or investors), the greater the stimulation on the economy, and the higher the revenue.

  • Obama's opposition to the Bush tax cuts were based on ideology. Obama believes in class warfare. He could care less how beneficial tax cuts for the affluent can be on the poor (in the form of job creation), he just cannot stand the rich getting richer. Typical of a person who said he supports tax policies that "benefit work" but not "wealth." In free market countries, the two are inseparable.

  • I wish both sides would understand that companies simply don't pay taxes. If politicians were serious about wanting to stop jobs from going to foreign countries, they would end the taxation of all businesses. Businesses collect taxes, they don't pay them. When a business is taxed, they pass the cost on to consumers in the form of lower quality products, higher prices, or both. If the taxes get too high where they are no longer competitive, they either go out of business or relocate to a more tax friendly environment. That is how we lose them to foreign countries. The US has the second highest tax rates of any industrialized country in the world. Raising taxes promises to make our situation worse. Furthermore, since businesses don't vote, cowardly politicians use taxation on business as a way to get companies to do their dirty work.

Daniel Webster said that “An unlimited power to tax involves, necessarily, a power to destroy." With that in mind, the government should be very selective in how it taxes and keep its destructive nature as limited as possible. A few possibilities include:

  • Stop taxing corporations. For the obvious reasons above.

  • Stop taxing wealth creation. Capital Gains taxes should be brought to a complete halt in this country as well as taxation on individuals.

  • Tax consumption instead of wealth creation.

  • If you insist on taxing individuals, make the tax flat (I don't like it, but it is better than the alternative). That would mean an equal percentage for all.

The bottom line is that we need to see taxation purely as a vehicle to effectively raise revenue. It isn't for social engineering, "spreading the wealth," or making up for past wrongs. It is about raising revenue. The best way of reaching that goal is by keeping taxes as low as possible, to generate the most economic activity, which generates the most revenue. We should stop punishing the engine of our prosperity.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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