Monday, June 18, 2007

The War Against Prosperity

Democrats in Congress and on the presidential trail are intensifying their high-tax war against prosperity and the so-called rich. Their latest salvo includes more tax penalties on successful investors and entrepreneurs, such as a proposed 4.3 percent surtax on high-income earners and a tax assault on the private-equity buyout industry.

The surtax allegedly would raise sufficient revenues to exempt middle-class folks from paying the alternative minimum tax. But the income threshold for this surtax has been alternatively suggested at $500,000, $200,000, or as low as $75,000 to $100,000, depending on the amount of new spending and earmarking envisioned by the Democratic Congress.

Meanwhile, Democrats (and some Republicans) are taking aim at the booming private-equity buyout industry, especially the much-ballyhooed public offering of Steve Schwarzman’s Blackstone Group. It seems these buyout guys are just too rich.

Up to now, Blackstone’s authoring statement had envisioned some kind of two-tiered tax plan, where ordinary corporate compensation would be taxed at the 35 percent corporate rate while high-risk investment-fund profits would be taxed at the 15 percent cap-gains rate. And now, senators Max Baucus (D., Mon.) and Charles Grassley (R., Iowa) want Blackstone to pay the much higher corporate tax on all its income.

Normal salaries and income from straight-out financial services arguably should be taxed at the corporate rate. But the investment partnerships inside Blackstone constitute risk-taking. For example, if the risks don’t pay off with profits, there is no income to be taxed. So, should the Baucus-Grassley plan set up a new multiple tax on capital, it would have negative consequences on economic growth while diminishing the economic clout for risk-taking.

And this is just the start. The next step will be to raise the overall tax on private buyout partnerships, even though there’s no intent to go public. Former Clinton Treasury secretary Robert Rubin suggests more than doubling capital-gains taxes on these partnerships, telling a Washington conference that the lower rate on capital gains hasn’t contributed one iota to the economy.

Class envy is behind all this. It’s an envy that despises the investment clout of buyout firms, even though these buyouts create leaner, more-productive, more-efficient companies that are better able to compete in the era of globalization. These buyouts are a necessary capitalist churning, but many politicians would prefer the status quo. In particular, labor unions are pushing their Democratic allies to stop the buyout movement in order protect inefficient jobs and oversized benefits.

Ironically, all this is happening while low-tax Reaganomics is spreading worldwide. Hence, this would be the exact wrong moment for U.S. politicians to raise taxes and impair American economic competitiveness. There’s really a much better way. Supply-side guru Arthur Laffer suggests that we embrace one simple flat-rate tax plan that would do away with false distinctions between corporate and capital-gains tax rates and abolish the multiple tax on investors. Don’t raise tax rates, lower them. Why not tax all this income once, and only once, at a 15 or 20 percent rate?

We better do something. Indeed, a tax-cut war is spreading across Europe, where lower levies on corporate profits in Spain, Germany, France, and the U.K. are aimed at better competing with the U.S. in the global race for capital. The successful supply-side experiment in Ireland has become a Euro-wide model. Average EU corporate tax rates have dropped to 25 percent, compared to the U.S. federal, state, and local average of 40 percent. Newly elected French president Nicholas Sarkozy intends to cut his country’s corporate tax, as does Spanish prime minister Zapatero, as does Italian premiere Romano Prodi. All this would follow large business tax reductions in Poland, Slovakia, and Hungary.

Aren’t the Democrats watching?

Out on the campaign trail, leading Democrats Clinton, Obama, and Edwards are all talking tax hikes. Sen. Clinton says, “The president’s irresponsible tax breaks for high- income Americans” must be allowed to expire. She then claims that the percent of taxes paid by corporations has fallen as corporate profits have skyrocketed. That’s backwards. During the Bush boom, business tax collections as a share of overall tax revenues have skyrocketed -- well above levels witnessed during the Clinton 1990s.

Point is, whether we’re talking individuals, corporations, or cap-gains, if you tax something you get less of it. If you take away the tax advantages from private partnerships, future deals will dry up. Or they will go offshore, where no taxes will be paid at all. And since capital is the seed corn of future economic growth, the Democratic war against prosperity will soon include the middle class as collateral damage.

In a recent interview, senior White House advisor Al Hubbard made it crystal clear that President Bush would pull out his veto pen on any tax-hike proposals coming across his desk. Let’s hope Mr. Bush follows through.