December 17, 2008 | Commentary on Economy, National Security and Defense

To promote general growth, Obama needs to go further

A centerpiece of Barack Obama's campaign was his promise to cut taxes for "95 percent of American workers." Middle-class voters, especially, responded strongly to that pledge - and now they expect our new president to deliver lower tax bills.

Tax cuts, done right, can strengthen the economy for both the short term and the long haul. Targeting families, workers and small businesses - as Obama also pledged - is a good starting point.

But the president-elect's promised tax cuts would deliver only minimal benefit to the groups of voters he wooed in the campaign. To really help them - and to promote general economic growth that benefits all - Obama must go further.

Here's how he can do it:

Reduce marginal tax rates and the total tax burden for taxpaying families. Candidate Obama promised to restore fairness to the tax code as well as cut taxes for 95 percent of workers. To the typical American, his words meant all taxpayers would get to keep more of their money to spend, save or invest as they see fit. Such words as "broad-based tax relief" don't mean breaks restricted to families whose activities Washington deems worthy. And they certainly don't mean government checks for millions of Americans who don't even pay any income tax. Lowering marginal rates, by contrast, would create greater incentives for work, innovation and entrepreneurship.

Candidate Obama proposed to pay for his tax cuts with a tax increase on those making more than $250,000, plus unspecified increases. This was a shortsighted foray into class warfare. It would mean higher taxes for investors and business owners, making it more costly to innovate and expand. Result: fewer new businesses, products and jobs.

It's not like the investor class isn't already pulling its weight. Those earning more than $250,000 already pay 48 percent of all income taxes. Yet 43 million tax filers - nearly a third of the 135.7 million total - paid no income tax at all in 2006 after credits, deductions and exemptions.

Lower capital gains taxes across the board. Candidate Obama pledged to help small businesses and start-ups by "eliminating" capital gains taxes paid by investors in those enterprises. This not only would be difficult to apply in practice, it likely would be counterproductive. It would complicate, not simplify, the tax code. The new president should decrease the cost of capital to help all businesses, large and small, start or expand operations. This would do far more to create jobs.

Kill the "death tax" once and for all. The estate tax strikes while families struggle to cope with loss of a loved one. And it costs the nation 200,000 or more new jobs a year. That's why Congress voted to completely phase out the death tax by 2010.

So why did candidate Obama promise to bring it back? He called it a "Paris Hilton" tax, but the folks who end up actually paying it are mostly owners of small or medium-size businesses. It's especially brutal on family farmers and ranchers, who are "land rich." All too often their sons and daughters have to sell off the family holdings to settle the death tax. That's no way to get the country back on track.

Permanently patch, or repeal, the alternative minimum tax. Without regular "patches" by Congress, the insidious AMT would capture more income from a growing number of taxpayers - 20 million next year, many of them middle class. Success here, as the president-elect rightly observed, will require fixing contradictory policies of the Congressional Budget Office that create a bias in favor of higher taxes and higher spending.

Absent these fixes, Obama's promised tax cuts for the middle class will require hefty spending cuts or tax increases elsewhere. Preserving current law isn't a tax reduction, and allowing the Bush tax cuts to expire in 2010 would mean a massive tax hike for investors that neither taxpayers nor the economy can afford.

"Tax cuts" for those who pay no taxes and indiscriminate, across-the-board "rebates" will not generate the growth America needs. Once in the White House, President Obama's first priority must be to help stabilize our flagging economy. That means lowering or eliminating taxes for everyone who pays them.

Alison Acosta Fraser is director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. This article is based on her contribution to a Heritage project, "Change We Believe In: Memos to President-elect Obama."

About the Author

Alison Acosta Fraser Senior Fellow and Director of Government Finance Programs
Domestic and Economic Policy

First published in the Minneapolis Star Tribune and moved by McClatchy-Tribune News Service