Tuesday, May 11, 2010

The Obama Mess - Taxes

I've always said that you are able to't separate taxes and spending, they are like salt and pepper. A candidate's tax policy ought to influence their spending, and vice-versa.

Well, I'm going to break that rule today. I'm going to overview Barack Obama's tax proposals, just taxes, without the spending. I'll go over spending later. Please forgive me, I have broken my own rule.

Now that we're all over my bending of my own rules, let's get down to business.

Taxes. among the most hated words the government applies, no one likes to pay taxes and nearly 40% of the country gets the luxury of not paying any income taxes. nevertheless those citizens are the ones that will benefit most from Obama's tax plan. Think about that for a second, folks who do not pay taxes will benefit most from Obama's tax plan.

The Obama campaign continually touts their tax cuts for 95% of Americans. The Tax Policy Center has already proven that number to be incorrect, around 80% of all tax units will receive no increase, not 95%. On top of that the Obama camp has redefined the word "cut."

Cut usually means to reduce or to shorten the amount. Most folks interrupt a tax cut to be a slashing of the rate they pay. even so, Obama's definition is slightly different. Obama does not in reality cut any rate (with the exception of income tax for senior citizens) he simply hands out government checks called tax "credits." look on tax credits as mail-in-rebates, you nonetheless pay the same rate, you just get a check out a couple of months down the road.

Obama's tax "cuts" consist of seven tax credits, they're...

-$500 tax credit ($1,000 a couple) to "make work pay" that phases out at income of $75,000 for individuals and $150,000 per couple.

-$4,000 tax credit for college tuition.

-10% mortgage interest tax credit (on top of the existing mortgage interest deduction and other housing subsidies).

-"Savings" tax credit of 50% up to $1,000

-An expansion of the earned-income tax credit that would allow single workers to receive as a lot as $555 a year, up from $175 now, and give these workers up to $1,110 if they're paying child support.

-A child care credit of 50% up to $6,000 of expenses a year.

-A "clean car" tax credit of up to $7,000 on the purchase of certain vehicles.

All but the "clean car" credit are refundable, meaning those who do not pay income taxes are eligible for the tax credit.

look on it like this, you and six of your friends are sitting around your room when you ask, "anyone want a pizza, we are able to all chip in and get one." All your friends say "yeah sure, let's do it." Unfortunately your bum friend Adam is there and he does not have any money, but being the great friends that you are everyone assures Adam that he is able to have a couple of pieces in spite of his lack of a contribution. When the pizza arrives Adam answers the door, hands the delivery guy the money and so eats 75% of the pizza. Everyone is furious at Adam because, in spite of not contributing anything to the cost of the pizza, he ate almost all of it. Obama's plan follows the same logic.

By the manner, the cost for all of those credits would rise over the next ten years by $647 billion to a staggering $1.054 trillion.

Obama pays for his "Robin Hood" plan by taxing the rich to death. $250,000 is the magic number for Obama, that's where he separates middle class from the wealthy. Under Obama's plan those making $250,000+ a year will see the following increases...

-Income tax rate from 35% to 39%

-Payroll tax increase - not a rate increase but the cap will be eliminated, meaning if you make more than $250,000 all of your income will be taxed (before it was all income up to $102,000)

-Capital gains tax increase - From 15% to 20%

-Estate tax - 45% for estates above $3.5 million

-Corporate tax - Close loopholes and keep at 35% (closing the loopholes is effectively a rate increase)

To put this in simple terms Obama will take from the rich ($250,000+/year) and give to the poor/middle class (normally those who make $85,000 or less a year).

So how does the rate increase on personal income effect small business? Great question, and I've got a great answer...it is going to suck to be a small business.

Obama and Joe Biden have made it a point to pull the statistic out that 95% of small businesses make less than $250,000 a year. While that's true it is not all too significant. The significant statistic to consider is 60% of all small business income falls into the $250,000 bracket. Those larger small business are the ones employing the majority of workers.

S Corporations (small businesses) that make more than $250,000 a year will see a rate increase from 35% to 39.6%. even so if you're a sole proprietor it is even worse. A sole proprietor is someone who is self employed and their business has no separate existence from their owner, under Obama's plan their tax rate would range from 50.3% to 54.9% (it depends on the payroll tax). The reason their tax rate is so high is because they must pay income tax and self employment tax (social security and medicare), combine the two and you've got a tax rate of up to 54.9%. Under McCain's plan their rate would stay at 37.9%.

The other significant point is that Obama-Biden say that small businesses will thrive under them. That might be correct until they strive an income of $250,000 or greater. What's the point of promoting and supporting small businesses when you are going to tax them at near historic heights when they strive a milestone of income? it is taxing success.

Obama creates a disincentive for innovation and growth. What small business owner would purchase additional small business or expand their own when 40% of their income would be taxed? Especially when they're giving it a government that has a 9% approval rating.

Also under the header of business is corporations. Obama would have a field day taxing corporations. He concedes that our corporate tax rate is the second highest in the world nevertheless he says no corporation in reality pays that amount because of loopholes in the code. Obama will fix those loopholes nevertheless keep the rate at 35%. So is good or bad that the rate is so high? Closing the loopholes and not lowering the rate accordingly is effectively a rate increase.

Obama would also increase taxes on corporation's overseas profits. Currently if a business has a foreign subsidiary and they bring those profits back to the states, it is taxed at the corporate rate of 35%. they are able to choose to defer those profits and not bring them back, thus avoiding the taxation. Obama would repeal this, taxing businesses for profits made overseas whether they are imparted back or not. Japan has a similar taxation in place, nevertheless they're regarding repealing it.

There was a bill passed a couple of years ago that experimented with additional solution to foreign profits. It was known as the 2004 American Jobs Creation Act, it taxed foreign profits imparted back to the states at 5.25%, rather than the corporate rate of 35%. The results were astounding. An estimated $362 billion flooded back into the United States through businesses. This provided companies to invest that money here rather than abroad. It resulted in government revenues of $18 billion. The lower tax rate worked because corporations in conclusion imparted the money back. Before they would reinvest it in the foreign country to avoid the high tax.

And in conclusion energy taxes. in spite of the falling price of oil, higher government taxation nonetheless has the ability to increase prices at the pump, and Obama's plan does just that.

For starters Obama wants a windfall profits tax that would cost the oil companies $15 billion. I can guarantee you that cost will be trickled down to consumers. The energy industry is an ever changing field that is extraordinarily expensive, oil companies save as a lot money as possible so they will not go bankrupt in the future. We tried a windfall profits tax before, and it failed. Domestic oil production went down, imports went up; the exact opposite of what Obama has promised. What makes Obama think that will alteration?

The two other tax increases effect more than just the energy industry. He'll raise the dividend rate from 15% to 20% and the corporate tax will stay at 35% with closed loopholes.

He also wants to institute a cap and trade that will force oil companies to pay for the emissions they create. This is an excise tax, and like most excise taxes this too will be paid by the consumer in the form of higher prices.

A major difference in energy policy between Obama and McCain is the ethanol tariff. Currently ethanol imported into the States is subject to a 54 cent tariff. McCain wants to repeal that tax, Obama wants to keep it in place to support corn based ethanol. The problem is corn based ethanol is nonsensical; it only has an energy ratio of 1.3-1, meaning it barely outputs more energy than it takes to produce. Sugar based ethanol which is produced by South American countries, namely Columbia, has an energy ratio of 8-1, it is very energy efficient, nevertheless it suffers from a large tariff. If Obama is so interested with energy independence and clean fuels he ought to promise to lift the ethanol tariff.

The main idea of Obama's tax policies can be simplified to one statement; the rich ought to pay more because they have more to pay. As Joe Biden put it, Obama supports tax cuts (in reality tax credits) to the middle class and small businesses "not because it is fair, it is what makes the economy grow."

That might be true, but once those middle class families and small businesses hit the $250,000 mark, that growth abbruptly comes to a halt.

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