The Obama Watch

Obama’s Taxes and America’s Jobs

As the former go up the latter will come tumbling down.

By 4.20.11

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Between President Obama's political campaign speech on the budget last week, and House Budget Committee Chairman Paul Ryan's thorough 2012 budget proposal, which the Republican House has already begun enacting, federal tax and spending issues have been fatefully framed for 2012.

Ryan's 2012 budget proposes to return federal taxes to their long run postwar historical average over the last 60 years of 18.3% of GDP. In sharp contrast, what Mr. Obama is proposing is to raise federal taxes well above that long-term historical average, to pay for much more federal spending well above the historical average.

So the issue for 2012 is joined. Do the American people want Mr. Obama's much bigger federal government with much higher taxes and much higher federal spending than the long-term trend over the past 60 years? Or do they want Mr. Ryan's traditional, American, limited government of the postwar era, with the traditional American prosperity we have enjoyed during that time?

President Obama's Tax Piracy

The context for considering this question is that in 2007, even before President Obama was elected, official IRS data showed that the top 1% of income earners were already paying more in federal income taxes than the bottom 95% of income earners combined. Moreover, the top 3% of income earners were already paying more in federal income taxes than the bottom 97% combined. This is what the pre-Obama income tax system would generate once normal economic growth is restored.

Already scheduled in current law for 2013 is the expiration of the 2001 and 2003 tax cuts, which President Obama last week refused to renew for single workers making over $200,000 a year, and couples making over $250,000, whom he disparaged as "millionaires and billionaires." Also scheduled to go into effect in 2013 under current law are all the tax increases of Obamacare. Together, these job killing tax policies would result in a sharp increase in the tax rates on the nation's small businesses, job creators, and investors for virtually every major federal tax.

The top income tax rate would increase by nearly 20%, counting the slashed income tax deductions President Obama already proposed in his February budget. The capital gains tax rate would increase by nearly 60%, counting the new Obamacare taxes on investment income. The total tax rate on corporate dividends would increase by three times altogether. The Medicare payroll tax rate would also increase by 62% for these taxpayers.

That adds up to a top federal tax rate of 44.8% on wage income, not counting the capital gains tax or tax on corporate dividends. Counting state income taxes, the top tax rate on wage income alone for most of the American people would be 50% to 55%. In Paul Ryan's Wisconsin, President Obama's tax piracy would add up to a top rate of 52.55%.

Ryan's budget repeals all of President Obama's already scheduled tax increases. So these Obama tax increases, if allowed to remain in law, would raise taxes above the long-term, postwar, historical average of federal taxes that Ryan restores. But there's more.

President Obama noted in his speech last week that his 2012 budget already calls "for limiting itemized deductions for the wealthiest 2% of Americans -- a reform that would reduce the deficit by $320 billion over ten years." This $320 billion tax increase would be above Ryan's long-term, postwar, historical average as well.

But President Obama last week called for raising taxes even more by denying still more regular deductions to these taxpayers, saying "But to reduce the deficit, I believe we should go further." He indicated that involves another tax increase of $1 trillion beyond what was already proposed in his budget. That would further increase taxes beyond Ryan's long-term, postwar, historical average.

President Obama, however, was still not done raising taxes. He called as well for an automatic tax increase trigger that would raise taxes still further in 2014 if "our debt is not projected to fall as a share of the economy." With these automatic tax increases, the tax burden would grow still more beyond Ryan's long-term historical average.

In addition, American business currently suffers virtually the highest corporate tax rate in the industrialized world at nearly 40%, counting state corporate rates on average. Even in the left-leaning European Union, the corporate tax rate has been reduced from 38% to 24% over the last 15 years, with lower corporate tax rates from China to India to Canada as well, leaving American business uncompetitive in the world. Yet, President Obama was oblivious to this and the resulting job killing effects in his budget speech last week, devoting just one sentence to a vague, rhetorical call for "corporate tax reform." Indeed, he proposed in his 2012 budget still more tax increases on American businesses, which are already built into the nevertheless still disastrous projections of deficits and debt in that budget.

Does this sound to you like fair tax policies likely to promote jobs and economic growth?

Tax Piracy Won't Reduce the Deficit

Economist Kurt Hauser was the first to establish from the historical evidence that the maximum federal tax paying capacity of the American economy was probably no more than Paul Ryan's long-term, postwar, historical average. Hauser showed that since World War II the top income tax rate has been as high as 92% in the early 1950s and as low as 28% in the late 1980s, and the share of federal taxes as a percent of GDP remained relatively stable all of that time at roughly 18-19% of GDP. This is known as Hauser's Law.

That resulted because the higher tax rates repressed incomes so much that even at the higher tax rates no more in revenues was produced as a percentage of GDP. But the lower tax rates produced such a boom in incomes that even at the lower rates no less in revenues was produced as a percentage of GDP.

So President Obama can pile all the tax increases on the top 1% he wants. Until federal spending is brought back down to its long-term historical average, deficits and debt will continue to soar above their manageable, long-term, postwar, historical average as well. Indeed, the budget will not be balanced until federal spending is reduced to the same long-term, postwar historical average as revenues.

Suppose the Democrats were able to go whole hog and confiscate all the incomes of all the millionaires and billionaires President Obama disparages. As the Wall Street Journal reported on Monday, that would raise only $938 billion, little over half of the deficit President Obama projected for this year in his 2012 budget released in February. Indeed, considering what these taxpayers are already paying, the net gain in revenues would be less than half the deficit.

For those left-wing vampires to whom this may seem like a tasty meal, recognize that this can only be done once. Facing a 100% tax, none of these taxpayers will produce any income at all to confiscate the second year, leaving the federal budget in an even deeper hole. Much worse, with none of these people working, none of the workers they hire would be working either. The resulting catastrophic loss of jobs would be much worse than the Great Depression, even with nothing stopping the homeless from continuing to employ everyone they currently hire.

Indeed, with the expiration of the Bush tax cuts in 2013 for those making over $200,000 per year, the new Obamacare taxes in 2013, the continued burden of the world's highest corporate tax, and any of the other tax increases President Obama seeks enacted, along with President Obama's high cost energy policies and other excessive regulatory burdens, the result in 2013 is quite likely to be a renewed double dip recession. That would mean much less in federal revenues rather than more, and much more in soaring federal deficits and debt as a result.

At best, the trillion dollars of additional tax increases President Obama proposed in his budget speech last week will never materialize, for all of the reasons above. To get his supposed $4 billion in deficit reduction over 12 years, President Obama assumed another trillion dollars in interest savings from the supposed deficit reduction. But with interest rates at historic lows for years now, interest rates are undoubtedly headed up, not down. And higher interest rates mean more federal spending, deficits and debt, not less.

The other $2 trillion was supposed to come from supposed spending cuts. President Obama claims that the agreement for $38 billion in cuts for the 2011 budget to avoid a government shutdown will add up to $750 billion over 12 years, even though CBO just said that adds up to only about $350 million in spending cuts for this year. The President called in addition for another $400 billion in defense spending cuts, on top of the $400 billion in such cuts he bragged had already been adopted over the past two years. That's after he just got us involved in a third military conflict in the Middle East.

Finally, the President called for another $500 billion in spending cuts to Medicare, through the health care rationing that he and his far left supporters have denied was involved in Obamacare all along. The President said, "And we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at the evidence and recommend the best ways to reduce unnecessary spending while protecting access to the services seniors need." In other words, a faraway, central planning bureaucracy in Washington, not your own doctors, will decide what health treatments are best for you, adding up to another $500 billion in savings over the next 12 years. And if that turns out to not be enough, President Obama proposes to empower a commission of unelected Washington bureaucrats to cut and ration Medicare even more.

Notice that even these supposed spending cuts don't add up to $2 trillion, even over 12 years, but $1.65 trillion. After telling us for over two years that meaningful deficit reduction requires addressing entitlements, President Obama in his budget speech made no mention of entitlements, except to attack Paul Ryan's proposed entitlement reforms, in completely unreasoned, inaccurate terms.

These are the reasons why Standard & Poor's on Monday effectively graded President Obama's deficit speech with an F by downgrading the outlook for U.S. government debt from "stable" to "negative," indicating the possibility that America would lose its AAA credit rating within 2 years. As the Wall Street Journal said yesterday, "S&P is simply connecting the political dots after last week's un-Presidential tirade against the GOP."

Tax Piracy Takes Your Jobs

What President Obama failed to recognize in his speech last week is that tax policy should be driven not by who "needs" a tax cut, but by incentives for economic growth, investment, production, and job creation. All of his job-killing tax increases would ultimately harm working people the most, as they would lose the jobs and wages they need for basic economic survival.

With the revival of inflation President Obama's policies are creating, real wages for working people are falling today. African Americans are suffering unemployment around 15% or above into their third year. Hispanics are suffering double-digit unemployment into their third year as well. Teenagers are being spanked by Obamanomics with unemployment over 20% for the same period, and black teenage unemployment over 40%.

These people are suffering a Great Depression under Mr. Obama. That is why the Census Bureau reports poverty at record levels, with more Americans suffering in poverty than ever before since the Census began keeping poverty records over 50 years ago.

The sweeping tsunami of tax increases Mr. Obama proposed last week would mean more of the same for these victims of Obamanomics, if not worse.

A Better Safety Net

For all of the weeping, and wailing, and gnashing of teeth from the Left, Paul Ryan's budget only slows the growth of entitlement spending to manageable terms. His careful, responsible reforms actually provide a better safety net than the current programs, including Obamacare.

Medicaid today so badly underpays doctors and hospitals that the poor face major difficulties in gaining access to essential health care under the program, and suffer worse health outcomes as a result. States would be free under Ryan's proposed reforms to provide financing to the poor to purchase private health insurance, empowering the poor to enjoy the same health care as the middle class, because they would enjoy the same health insurance as the middle class.

Similarly, Ryan's proposed Medicare reforms are clearly better for seniors than the $15 trillion in Medicare cuts under Obamacare and President Obama's Medicare reimbursement policies already enshrined in current law, and the further Medicare cuts President Obama endorsed to be adopted by unelected, unaccountable bureaucrats on his Independent Medicare Advisory Board. Unlike Ryan's careful reforms, these Obama cuts apply to seniors already retired today. The government's own actuaries and scorekeepers are already telling us that seniors will not be able to get essential health care under these unworkable, irresponsible cuts.

President Obama's budget speech was not a serious budget proposal showing how to reduce America's bankrupting federal deficits and debt. That is why it was greeted with an S&P downgrade. Rather, it was a political document showing that President Obama intends to campaign for reelection not from the center but from the Left, hoping to maximize the vote from his left-wing political base. That completes the transformation of the Democrat party into an overt European socialist party, with most national income going to the government for redistribution based on its political calculation, rather than being spent by the workers, investors, and taxpayers who produced it in the first place.

President Obama is not an extreme figure within his own party. He is enjoying 80% approval from Democrats. In the wake of the Democrats' choosing ultra-left San Francisco Democrat Nancy Pelosi to remain as their leader after last November's political shellacking -- she still condescends to voters that they are grossly in error -- and selecting unreasoned left-wing screamer Debbie Wasserman Schultz as DNC Chairman, today's Democrat party leadership is now more reminiscent of socialist parties from Brazil to Mexico to Venezuela to France to Sweden than of America's traditional Democrats. That is why the lesson to be drawn in regard to today's Democrat party is this: Friends don't let friends support Democrats.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.