By Dick Morris on September 22, 2008

Whatever is left of the economy after the current round of crisis interventions by the Fed could go down the drain if Obama is elected and carries out his plans for sharp increases in taxation. Even if Obama does not understand the linkage, most Americans do and will turn sharply against Obama’s tax plans if McCain hammers away at the risk they pose for us all.

During the Great Depression, Congress raised taxes sharply in the Revenue Act of 1932. The top rate went from 25% to 63%. As a result, the real GDP dropped by 13.3% and unemployment rose from 15.9% to 23.6%.

In 1990, Buash-41 famously broke his “read my lips – no new taxes” pledge of the 1988 campaign and raised the federal gasoline tax, federal excise taxes, and imposed 10% surtax on the top income bracket, raising its taxes to 31%. The recession which followed in 1991-1992 cost him re-election.

It is obvious that increasing capital gains taxes by a minimum of one-third and possibly doubling them, both of which Obama has proposed during his campaign, would send a clear signal to investors to keep their money under the mattress. Who would buy stock now knowing that the tax on any profits he or she will make is going to go up sharply if Obama becomes president.

Look at what happened just last year in Michigan. Democratic governor Jennifer Granholm raised taxes on almost everything in 2007. Income taxes shot up 11.5% and the state’s 6 percent sales tax was expanded to dozens of new services like investment advice, janitorial services, landscaping, ski lifts,=2 0carpet cleaning, and tanning. The $1.75 billion tax package shook the economy to its foundations. Michigan became the only one of the fifty states with a shrinking gross domestic product (GDP). The value of all goods and services produced in the state fell by one half of one percent while the national GDP rose by 3.4%. The state fell from 23rd in GDP to 35th. Taxes caused a disaster.

In a strong economy, Obama’s tax hikes would raise questions. In a weak economy, they portend a catastrophe. It would be like bleeding a sick patient, the medicine of two hundred years ago, depriving him of blood even as he needs more not less circulating through his arteries.

McCain’s populist rhetoric, including his pledge to fire SEC Chairman former Congressman Christopher Cox, is important for a Republican candidate. But his focus should shift to the tax issue. With firms suffering, withering, and dying for a lack of capital, tax increases on those who invest would be a horrible mistake. Americans will realize this obvious fact and McCain should use it to gain the advantage in discussing the economy. There is no reason for the economy to work to Obama’s advantage when he is committed to a doctrinaire program of tax increases and spending hikes. McCain can use the issue to run rings around him.

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