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The truth about Obama's tax cut extension plan

Politics, not economics, is driving President Obama's election year strategy to force a battle over his efforts to raise income taxes. So much of Obama's speech Monday focused on his political opponents and the difference between those whom he claims support the middle class and those who support what Obama continually called "the wealthy." 

For an administration that last week blamed Fox News for the class warfare rhetoric, Obama's talk today sure contained a lot of such rhetoric.

But contrast Obama's position with that of other prominent Democrats. Just last month, his former chief economic advisor Larry Summers told MSNBC: "The real risk to this economy is on the side of slow down, certainly not on the side of overheating, and that means we've got to make sure that we don't take gasoline out of the tank at the end of this year that's gotta be the top priority." Former Democratic President Bill Clinton made a similar claim warning against tax increases because it is better to "avoid doing anything that would contract the economy now." Under Obama administration pressure both quickly retracted their statements.

Obama seem oblivious to Summers' and Clinton's concerns about the poorly performing economy. In recent statements Obama has claimed: "The private sector is doing fine" and the latest job numbers really are "a step in the right direction."

Yet, Summers' and Clinton are right to be concerned. 

The economy is very weak. Indeed, this is the weakest recovery ever, with the economy growing at less than two percent. Job growth averaged just 75,000 jobs a month over the last three months and doesn't come close to keeping up with the 210,000 average monthly net increase in working age workers. Thirty-seven months into the recovery and jobs have increased by only 1.7 percent. During the average recovery since 1970, job growth has been 7.3% and it has been even faster after severe recessions.

President Obama kept pointing out Monday that he has cut taxes. But he doesn't understand that the way that he cut taxes actually discouraged work for one simple reason: he increased marginal tax rates.

Unfortunately, Obama's policies are bad economics. According to Obama, letting those earning over $250,000 a year keep more of their money doesn't help the economy. He claims it does little for demand.

This Keynesian argument is based on the notion that poorer people spend more of their money than do wealthier ones. It is the same logic that has had Democrats advocating more unemployment insurance benefits. As former House Speaker Rep. Nancy Pelosi (D-Calif.) explained: "it injects demand into the economy and is job creating. It creates jobs faster than almost any other initiative you can name. Because again it is money that is needed for families to survive and it is spent." It is also a constant theme of in Obama's campaign talks.

The claim that some people are engaged in "spending" their money while others are "saving" it really assumes that saving is the equivalent of burying one's money in a hole in the backyard. In reality, everyone's money is spent. 

Say you put your paycheck in the bank. Some of it you spend on your mortgage or rent and some on car payments and food. But the rest of the money doesn't just sit there gathering dust. The bank either lends out the money for others to spend or it buys bonds.

President Obama kept pointing out Monday that he has cut taxes. But he doesn't understand that the way that he cut taxes actually discouraged work for one simple reason: he increased marginal tax rates. Obama's tax cuts increase marginal tax rates because he phases out deductions and credits as people make more income. You get the earned income tax credit or the college tuition credit but as you earn more money more of those credits are taken away from you. Those lost tax benefits are on top of the unchanged official marginal tax brackets. Average tax rates went down, but marginal tax rates went up.

The president said he wants “an economy where work pays off.” But if you actually want to give me an incentive to work more it is the marginal tax rate that matters. The solution is obvious: let people keep more of each additional dollar they earn.

Hopefully, most people understand that cutting tax rates, not increasing unemployment insurance payments, are what stimulates the economy.

It isn't just our individual income tax rates, which both individuals and many small business pay, that are a mess. With the highest marginal corporate income tax rates in the world, our tax policies not only discourage investments by Americans, they also discourage investments by foreigners. These are investments that would increase worker productivity and increase wages.

A favorite phrase employed by Obama over the last few months has been used to accuse Republicans of wanting a “top down” economy. It is a good phrase, as voters probably understand the perils of having everything controlled by some central bureaucrat. Yet, companies don’t dictate to consumers what they will buy. Obama, with his massive government health care bureaucracy that is going to approve what surgeries we can receive, is the ultimate “top down” central planner.

President Obama's class warfare rhetoric may be good politics. Monday he pointed to the polls that he claimed supported his desire to increase taxes on "the wealthy." But if the desire is to grow the economy, his policies are bad economics.

John R. Lott, Jr. is a columnist for FoxNews.com. He is an economist and was formerly chief economist at the United States Sentencing Commission. Lott is also a leading expert on guns and op-eds on that issue are done in conjunction with the Crime Prevention Research Center. He is the author of eight books including "More Guns, Less Crime." His latest book is "Dumbing Down the Courts: How Politics Keeps the Smartest Judges Off the Bench" Bascom Hill Publishing Group (September 17, 2013). Follow him on Twitter@johnrlottjr.