Redistributing income and promoting middle-class dependence on government was the recurring theme in Tuesday’s State of the Union address. During a time when the labor-force participation rate is at its lowest in decades, more important matters are getting people back to work and policies to encourage long-term investments in jobs. But Obama’s version of “middle class economics” was more about paying people’s bills with other people’s money and less about fostering job creation and income growth.
The president’s main highlights were the freebies he wants Congress to conjure for the middle class. He did not get into much detail about how he plans to pay for them, only saying that everybody should pay his or her “fair share.” He would start by punishing savings and investment, the foundation for the economy. The president wants to raise the capital-gains tax rate for high income earners to 28 percent. In fact, he notes that it would go back to the rate “under President Reagan,” as if to say, “See folks, I’m a conservative, too!” But the truth is that Reagan also significantly reduced income tax rates during his presidency. By 1988, the top marginal tax rate was 28 percent, down from a top rate of 70 percent in 1980. This president has done no such thing, but has raised the top marginal income tax rates and the Medicare tax rate for high-income earners.
Besides Obama’s deceptive attempt to be Reaganesque, a capital-gains tax increase in the hopes of more government revenue will likely falter. Capital-gains tax revenue is volatile; investors have the choice of holding onto their investments to avoid the tax as opposed to selling them. But lowering the tax reduces the cost of capital, incentivizing the selling of assets and encouraging more investment.
SOTU Special: Special Preferences for Two-Income Homes
In an appeal to the middle class, Obama proposed a $500 “second earner credit” for married households where both spouses work. He admits that two-earner couples face high costs associated with both of them working, including costs of transportation and child care. While he has the right premise, the solution is wrong. The marginal tax rate on a second-earner spouse (particularly in families where one spouse far outearns the other), is much higher and punitive for second earners. This would not be the case where an unmarried couple was living together and filing separate returns. The real solution? Forget the tax credit and change the tax code so that the marginal tax rate for a married couple is the same as the rate for an unmarried couple.
The goodies for two-earner couples did not stop there. President Obama wants to expand the child-care tax credit up to $3,000 per child. What about the same tax credit to households that sacrifice the additional income when one of the spouses chooses to stay home with the children? Nothing for them.
In some cases, it was not clear whether Obama was for or against his own ideas. While he advocated for free community college, at a taxpayer cost of $60 billion over 10 years, he also wants to remove the tax advantage of 529 education savings accounts that allow families to save for their children’s future college expenses.
I Know: Let’s Make It More Expensive to Hire People
On the jobs front, Obama proposed another way to increase the cost of hiring: Mandatory paid sick leave for private firms. Besides the higher costs employers have already been socked with—various state and local minimum wages and health insurance costs and penalties—this additional cost to hiring will simply result in employers who least can afford the mandate finding ways around it, such as reducing paid vacation or other voluntary perks. Instead, why not let firms offer packages of benefits tailored to the needs of their firm and employees? For instance, allow firms to reduce the number of paid sick days provided in exchange for a monetary bonus, or no overtime pay in exchange for comp time.
Meanwhile, in the department of economic growth and global competitiveness, Obama must think that no news is good news.
Corporate tax reform? Crickets…
Rising disability rolls and more people dropping out of the labor force? Nothing to see here…
Deficits and the national debt? Congress doesn’t care, folks, so why should you?
The bottom line is Obama’s State of the Union foresees a state of more dependence on government and less economic opportunity and growth.