"Many members of the other party believe that prosperity comes from the top down," President Obama said in his Rose Garden speech Monday, "so that if we spend trillions more on tax cuts for the wealthiest Americans, that that will somehow unleash jobs and economic growth. I disagree. ... I believe our prosperity has always come from an economy that's built on a strong and growing middle class ..."
This passage, from a speech in which Obama advocated higher taxes on those making more than $250,000 per year, contains at least three important fallacies. But set aside for a moment Obama's misleading equivocation between lower tax rates and "spending trillions." Also set aside the absurdity of this president, whose central economic planning has wasted billions on failed and failing solar power firms, complaining about a "top-down" economic policy. Focus instead on the straw man that Obama erects -- that of so-called "trickle-down economics."
Conservatives do not (or at least should not) mistake lower marginal tax rates for some kind of magic elixir. They do not support tax cuts because there is a massive public benefit, per se, to having the wealthy pay less. The argument for lowering marginal tax rates is that when such rates are too high, they become an obstacle to businesses expansion and, by extension, hiring. By lowering marginal tax rates, lawmakers can remove at least one reason for business owners and investors to keep capital on the sidelines -- which is where a lot of capital is right now.
The argument against Obama's plan to raise the top marginal tax rate is that it will come as a punch in the gut to small business -- a very large and important part of the U.S. economy. Obama's proposed tax hike will apply to 53 percent of all business income, according to the nonpartisan staff of the congressional Joint Committee on Taxation, guaranteeing a lower rate of return on investment.
Obama wants small businesses, which struggled with meager profits for the last three years, to be squeezed to pay for more of his government expansion, just when they are hoping to make up for lost time. At the very least, their plans to expand and hire will be pushed further back. More investment capital will go overseas, and jobs with it. Some business owners will decide to contract or even go out of business, reasoning that their small and now shrinking profit margins do not justify the large amounts of capital they must tie up in order to operate.
In his speech Monday, Obama also tried to justify his tax hike by referring to the failure of tax cuts by his predecessor. "[W]e've tried it their way," Obama said. "It didn't work. ... Instead of creating more jobs, we had the slowest job growth in half a century."
Obama is doing one of two things here with his rhetoric. If he is describing the job growth of the Bush years after 9/11, then it is worth mentioning that it was much faster than what we are experiencing now. But if he is implying that lower tax rates somehow contributed to the financial panic of 2008 SEmD a singular event in which 7 million of the jobs created since 2001 were lost in a matter of months SEmD then America is truly led by someone who does not know what he is talking about.