Nowhere to Hide from Higher Taxes

03/02/2009 11:04 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

I didn’t believe they’d do this!  Late last year, after attending the press conferences where President Obama introduced his economic team, I expressed optimism.

There was Paul Volcker, who rescued America from runaway inflation, by increasing the prime rate to 20 1/2 % as Federal Reserve chairman in the early 1980s. Surely, Volcker would influence the new administration to avoid money creation, which only leads to inflation.

There was Tim Geithner, the new Treasury Secretary, a product of the Federal Reserve Bank of New York. That Fed sits on the money desk, on the front lines of currency trading. Surely, Geithner understands the importance of the dollar’s strength, which comes ultimately only from a sound currency.

But maybe I should have noticed that President Obama never modeled himself after President John F. Kennedy, as Bill Clinton did. If JFK were the model, Obama might have remembered Kennedy’s approach to income taxes: “Paradoxically, the way to increase tax revenues is to cut tax rates.” Kennedy, of course, cut the top personal tax rate from 91 percent to only 70 percent!

President Obama models himself after President Lincoln. I couldn’t remember learning anything about President Lincoln’s tax policy, so a search surprised me: To fight the Civil War, Lincoln installed the first income tax!  

Only three months ago we were marveling at the fiscal ineptitude of a Republican administration.  Unwilling to reign in Congress, the result was an orgy of spending as the word “earmark” became part of our vocabulary. In hindsight, the last administration did all the wrong things at the start of the crisis—dragging their heels, handing out taxpayer money freely to their chosen recipients, and pontificating publicly on the critical status of the economy and financial system.

Surely, no one could have handled it worse.

Oh, yeah? Well, it’s beginning to look like not much has changed. There’s still the same negativity—relieved only briefly by the president’s speech to a joint session of Congress last week. And they’re still throwing taxpayer dollars at the problem. But the government is no longer mired in the status quo. Things are changing. 

Without much thought to the consequences, the president’s latest tax and budget proposals are aimed at creating a greater divide, as if hurting the wealthy will help the poor. 

Reducing the mortgage deduction for wealthy Americans has the unintended consequence of destroying jobs for the laborers who build those houses. Remember when they put a “luxury tax” on “yachts” back in 1990—driving boat makers like Brunswick and Viking to the edge of bankruptcy and destroying thousands of jobs in the industry? 

And how do you help the poor by taking away the incentives to give to charity? With lower deductions on charitable contributions for top earners, wealthy people will still give out of the goodness of their hearts—but just not so much! Surely, that’s a disincentive we don’t need in these tough times.

The Republicans in Congress long ago gave up their right to point fingers on the issue of economic policy. They gave the Democrats just the excuse they needed to justify “Robin Hood Economics.” 

Both parties seem to have forgotten the economic lessons of two great presidents who rose above the political fray to understand that American citizens truly prosper only through economic growth.

You probably remember what President Reagan said about tax cuts, so I’ll leave you with this comment made by President Kennedy on July 17, 1963: 

“The most urgent economic business before the nation is a prompt and substantial reduction and revision of federal income taxes in order to speed up our economic growth and wipe out our present excessive unemployment.”

They’re getting history wrong in Washington. And we’re all going to pay for it! Do you agree? Please have your say and join the conversation.

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