Markets are voting against Obama economics

Jack Kemp and Peter Ferrara:

Are Barack Obama's proposed tax increases adversely affecting our financial markets? We say yes, unambiguously. The senator has done a masterful job distracting attention from his tax increases with his $500-per-worker tax credit supposedly for 95% of Americans.

Obama has also set forth more than half a dozen additional refundable income tax credits targeted to low- and moderate-income workers for child care, education, housing, welfare, retirement, health care and other social purposes.

These tax credits are devised to phase-out based on income, which will ultimately increase marginal income tax rates for middle-class workers. In other words, as you earn more, you suffer a penalty in the phase-out of these credits, which has the exact effect of a marginal tax rate increase. That harms, rather than improves, the economy.

With the bottom 40% of income earners not paying any federal income taxes, such tax credits would not reduce any tax liability for these workers. Instead, since they're refundable, they would involve new checks from the federal government.

These are not tax cuts as Obama is promising. They are new government spending programs buried in the tax code and estimated to cost $1.3 trillion over 10 years.

Obama argues that while these workers do not pay income taxes, they do pay payroll taxes. True, but his planned credits do not involve cuts in payroll taxes. They are refundable income tax credits designed to redistribute income and "spread the wealth."

Meantime, Obama has proposed effective tax increases of 20% or more in the two top income-tax rates, phasing out the personal exemptions and all itemized deductions for top earners, as well as raising their tax rates.

He wants a 33% increase in the tax rates on capital gains and dividends, an increase of 16% to 32% in the top payroll tax rate, reinstatement of the death tax with a 45% top rate, and a new payroll tax on employers estimated at 7% to help finance his health insurance plan. He's also contending for higher tariffs under his protectionist policies.

Finally, he would increase corporate taxes by 25%, though American businesses already face the second-highest marginal tax rates in the industrialized world, thus directly harming manufacturing and job creation while weakening demand for the dollar.

Obama argues disingenuously that his tax increases would only affect higher-income workers and "corporate fat cats." But it is precisely these top marginal tax rates that control incentives for savings, investment, entrepreneurship, business expansion, jobs and economic growth. While he wants to tax the rich, the burden will fall on the poor and the middle class.

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There is more. The Democrats have been blaming the current economic problems on the Bush administration even though they created the problem with their insistence on banks making bad loans. I think the Republicans and McCain can also argue that much of the current volatility in the stock markets is based on a fear of what the Democrats and Obama would do to the economy going forward.

There are two things you can count on if the Democrats win next week. If their policies don't work they will blame Bush. If the economy was not really as bad as they have been saying they will take credit when it looks better.