Would Obama’s Tax Plan Cost Jobs?

August 7, 2008

John McCain has been taking shots at Barack Obama's tax plan (the one that raises taxes on the investment income and labor income of high-income households), arguing that such a plan would cost American jobs (typical political rhetoric), which he says we cannot afford to do in the current economic situation. Yesterday, McCain said this: "Raising taxes in a bad economy is about the worst thing you can do because it will kill even more jobs when what we need are policies that create jobs."

But McCain, who has demonstrated that tax policy is not his greatest area of expertise throughout this campaign, is mixing business cycles (short-run macroeconomy) with policies that mainly affect long-run economic growth. Investment, by its very definition, is for the future. Raising the corporate income tax or taxes on capital gains and dividends may not be good policy, but such policies are not going to destroy the short-run economy. Such policies would likely lead to lower standards of living in the long-run (ignoring the effect that the deficit could have on national savings), but saying that our economy cannot afford them given the current economic situation is nonsense.

And with regard to the "jobs" terminology, McCain ignores the fact that in a free market over the long-run, much of the change will be on the wage side rather than the quantity (# of jobs) side.

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