September 30, 2010

Economics in the news.

One of the biggest issues facing us in this election year is the Obama's proposed tax hike. While Obama has promised to retain the tax cuts for households with an income below $250,000 dollars and individuals making less than $200,000, he has stated that he plans to raise the tax rate from 36% to 39.6%. Is this a good strategy on Obama's part?

The first thing to think about is how this would effect the economy. A greater tax increase would result in more money in the national budget, helping to pay off the deficit and Obama's healthcare reform. Certainly the people who are effected would be able to take it, only 1.7% of households fall under this law under Obama's definition of income. But is this may not be an efficient source of income. While this result in a greater cash flow, those effected would still only pay a small portion compared to the rest of the U.S. Unless we want to become somewhat socialist, there is no way to narrow this gap. Not only that, but most of these households are probably investing their income into their companies, hurting growth and development. With unemployment this high, hurting growth is something that isn't advised.

Perhaps more interesting is not Obama's proposed income tax hike, but his tax increase on capital gains and dividends going to high earners. Obama is proposing raising the top rate on capital gains from 15% to 20%, and taxing qualified dividends at 20%, effecting these high earners much more. These hikes will hurt the top investors, people who spend plenty in the economy, this is not the best way to raise money.

Obama is already in a precarious situation, the economy is down, the deficit is in the trillions, and Congress isn't cooperating with him. His proposed health care reform was sliced down so much it became potentially harmful, and he needs to find ways to turn it around. Tax hikes are not the way to achieve this. A tax hike can be effective and beneficial for the economy when it is rising, giving the government more money and helping to combat inflation, but in a downward economy it is not the answer, and does more harm than help.

In my opinion, the best thing to do in this situation would be to raise tariffs on various imports. Part of America's problem is that money is being taken out of the U.S. and invested overseas, money doesn't always come back to us when it goes over there. Keeping money in the U.S. would hurt global expansion, but hopefully it would create greater expansion in the U.S. While keeping low tariffs has helped the U.S. in the past, with more companies outsourcing overseas, and our manufacturing coming from other countries, it can be causing harm to our economy. Promoting American products helps boost our infrastructure, and hopefully would create more jobs here.

Whatever the case, Obama should probably lay off for now, and consult more experienced economists. While it is understandable that he wants to do something, he probably doesn't want to sit around with the economy this bad, he is severely limited in what he can do. Any actions he takes now are potentially dangerous, perhaps it is safer to let the economy work itself out. And with congress bickering among itself, strong, decisive action is hard to achieve. But hopefully, Obama will take a little knowledge from Regan, and realize that sometimes, you have to think outside the box to increase tax revenue.

Any comments and criticism would be appreciated.

1 comment:

Larry Eubanks said...

You've tackled a topic that requires normative economic analysis, and I intend for this course to avoid normative analysis.

But, let's see if I can point to the normative difficulties raised by your suggestion that the best thing to do raise tariffs.

The "fleecing" question on the midterm suggested that at least two results would be associated with a tariff: (1) some producers would be better off, and (2) consumers of the product would be worse off. Both the better off producers and the worse off consumers are U.S. citizens. How are you going to decide that it is better to help those producers at the expense of those consumers?