How a principled Obama could destroy the US economy

Obama's economic plan, if he managed to implement it, would have a devastating impact on the US economy and have the exact opposite effect that he intends.  There is much fodder for critique but I will focus on three points that I have heard him advocate most frequently and fervently:  increasing corporate tax and capital gains, closing "corporate tax loopholes", and increasing minimum wage.  The corporate tax rate in the US is currently 35%, the second highest in the world.  In reality it is not quite that high.  There are different deductions and exemptions that are too complicated to go through, but in short the effective corporate tax rate is probably in the high 20's, let's say 27%.  That still places the US on the upper end of the corporate taxation in the developed world.  Obama wants to prevent jobs from going oversees but unfortunately that is exactly what would happen if managed to increase corporate tax to 40% as he proposes.  He also proposes to close corporate tax "loopholes".  If he is successful, that would make the effective tax rate 40%, which would be a significant jump from where we are.  We can have a moral debate about how much of the tax burden should be borne by corporations vs. citizens.  The practicality is another matter and there really is not much to debate.  We have an increasingly global economy.  A handful of states are home to a disproportionate number of corporations due to favorable state taxes.  Corporations previously incorporated in the state in which they planned to do business, but that is no longer necessary.  The world is getting to the point that what made sense on a state level will make just as much sense on a global level.  There is little reason for corporations to remain in the US and pay 40% corporate tax when they could incorporate in Ireland and pay 11%.

Currently US based multinationals use clever legal accounting to transfer profit to other countries with lower tax rates.  Therefore other countries get the tax revenue that was actually produced in our country.  Closing the current "loopholes" and increasing corporate tax will only drive them out entirely.  What we really need to do is lower the corporate tax and close the loopholes.  The effective rate would not be significantly lower, but the incentive to transfer profit abroad would largely be removed and would thus increase the revenue received by the US treasury.

I won't spend a lot of time on Obama's plan to increase the capital gains tax because I think most people generally know that it will likely actually reduce tax receipts from capital gains and hurt the US stock market.  History tells us that when capital gains are increased, revenues decrease, and when capital gains rates are decreased, revenues increase.  It is nearly as easy to invest in foreign stock markets as it is to invest in the US.  If I can pay lower capital gains taxes on foreign investments you can bet that I will be investing there.

Finally, Obama plans to increase the minimum wage.  On the surface it seems like a decent idea.  After all, I wanted that single-mom working full-time trying to support her children, the one that Obama talks about during his minimum wage discussions, to be able to earn a living wage.  The problem is that only about 6% of minimum wage earners over the age of 24 are single parents.  Most are between the ages of 16 and 24.  The average household income for people earning minimum wage or less is more than $50,000. (Stats from Bureau of Labor Statistics)  Though it would make high schoolers happy, an increase in minimum wage raises the expenses for businesses employing people who make minimum wage, which will then increase the costs of goods and services provided, which will then disproportionately harm those who shop mostly at business that hire minimum wage employees.  The least impacted will be wealthy individuals who shop at higher end stores and pay for higher end services that will not be as significantly impacted by the change.

In each case it is the poor who will ultimately be hurt the most.  Those who are wealthy enough to rely on investments for income will be fine because they can simply invest overseas as our economy falters and taxes on US investments rises.  Corporations can simply move overseas and import their goods to the US.  Finally, the wages of the cashier at Whole Foods, the salesman at Coach, and barista at Starbucks will not change because they are already well above minimum wage and thus our yuppie friends will coast through largely unscathed.  Meanwhile, that single mom who buys her groceries at Wal-Mart, her clothes at K-Mart, and treats her three kids to a Pizza Hut party on Saturday will wonder how she is making $2 an hour more but is even further behind her bills at the end of the month. 

If Obama is elected there is some hope that things will not be as bad as I have described.  Perhaps he will be prudent enough to listen to a free market economist for advice like Clinton did, though I have seen little indication that he would ask a Republican for advice on anything.  The one positive is that he does not seem terribly principled on many of his positions and so may be willing to sacrifice his economic principles in favor of pragmatism.  His stance on the war inches daily closer to the position McCain has been defending for the past several years.  Judging from his record and his rhetoric, he may be willing to be compromise if there is at least some pressure from Congress to do so.  The only principle on which he has never waivered is denying basic human rights to the unborn or recently born.  So as long he doesn't decide that a sound economic plan could somehow indirectly lead to granting those little ones rights, perhaps there is some hope...for the economy anyway.