The Obama Watch

The December Surprise

Obama will never deliver on the middle-class tax cuts he promised. Get used to it.

By 9.29.10

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"I can make a firm pledge. Under my plan no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes."

That was the central pledge on which Barack Obama was elected President. He pledged to extend the Bush tax cuts for everyone making less than $250,000 per year, but to let them expire and raise tax rates for "the rich," which he defined as those making more than $250,000 per year.

President Obama and the Democrats have had two years to make good on this pledge. And now they have failed. Last week, House and Senate Democrats decided not to hold a vote on extending the Bush tax cuts before the election in November. As a result, a tax increase of $4 trillion is now scheduled to go into effect on January 1, the largest tax increase in world history. And most of that is on the middle class and lower income workers.

The bottom tax rate of 10% would increase by 50% to 15%. The other tax brackets would rise by similar amounts as well. The child tax credit would shrink by one-half. The marriage penalty, taxing a couple more than if they had remained single, would go back into effect. For a family of four earning $50,000 in income, the income tax burden would rise by nearly $3,000 in 2011 alone, according to a study by the tax accounting firm Deloitte Tax LLP. For a small business owner earning $100,000 a year, the income tax burden would rise by $4,500 per year.

This is apart from all the further taxes in Obamacare, and the other tax increases the Democrats have adopted over the past two years. The Alternative Minimum Tax will also apply to another 25 million middle class taxpayers next year, further increasing their tax rates.

In his weekly radio address last Saturday, President Obama continued his deceptive rhetoric to mislead voters about all of this, saying, "Instead of cutting taxes for the wealthiest few -- tax breaks we cannot afford -- I've called for tax cuts for middle class families." But if Bush and the Republicans cut taxes only for the wealthiest few, then why is the expiration of their cuts raising taxes on the middle class and even more modest income earners, as just shown above? And while President Obama did indeed "call for tax cuts for middle class families," that is how he got elected in fact, it was Bush and the Republicans who actually did cut taxes for middle class families, while Obama and the Democrats have failed to make good on even continuing those tax cuts.

Not to worry, the Democrats say, they will come back and extend the Bush tax cuts for the middle class in the lame duck session after the election. But why after the election? If they have not done it in the last two years, why can they be trusted to do it if the voters give them another two years? Has this Pelosi/Reid crew of surly pirates proved worthy of such trust? After they are reelected, if they don't make good on their promise in December, you will be stuck with them and the thorough socialist nostrums of today's Democrat Party for the next two years.

Or is the real desire of the Democrats to forget about those Bush tax cuts altogether, because they want the money for even more government spending to buy even more votes for their Big Government political machine? As the Wall Street Journal explained on Monday:

Keep in mind that this is the not-so-secret desire of many on the left who think the country 'can't afford' to let Americans keep so much of their own money. Peter Orszag has already admitted this since leaving his post as White House budget director. What these Democrats really mean is that they think the only way to pay for their spending plans is by soaking the middle class -- because that is where the real money is.

The December Surprise

President Obama himself gave a veiled indication Monday that the Democrats may, in fact, be planning a "December surprise" for voters, after the election. In denouncing the Republicans' Pledge to America, discussed further below, President Obama said, "They propose $4 trillion worth of tax cuts and $16 billion in spending cuts. And then they say we're going to somehow magically balance the budget. That's not a serious approach."

That $4 trillion in tax cuts mostly includes the middle class provisions Obama has pledged to extend. The tax increases on the rich (those greedy overachievers earning over $250,000 a year with their excessive work habits) are estimated by the government itself to raise only $700 billion.

What Obama is suggesting here is that extending the middle class tax cuts needs to be offset in some way. In other words, allowing the middle class to keep trillions of its own money needs to be "paid for." And don't think that after a lifetime of extreme neo-socialism President Obama is talking about trillions in spending cuts. (You need the Tea Party for that).       

What is scheduled for December 1 is the report of President Obama's Debt Commission. After that, as well as after the election, is when Democrats now propose to take their vote on making good on their campaign pledge to the middle class. The December surprise will be to propose an offsetting tax increase on the middle class to make the Bush tax cuts permanent, such as a Value Added Tax (VAT), which House Speaker Nancy Pelosi and other top Democrats have already endorsed. That, the Democrats will say, is the serious, responsible approach, relying on the report of the Debt Commission to back them up.

That, of course, would leave the middle class on net without the tax cut that Bush and the Republicans adopted for them. It would leave the voters with a massive tax increase on net instead, as compared to taxes in effect this year. So much for President Obama's deceptive call for tax cuts for middle class families. This is the "December Surprise" that Democrats are planning for voters.

A Pledge to America

The Democrats' campaign strategy this year is based entirely on name-calling and mudslinging. So it is no surprise they have already howled that the "Pledge to America" issued by House Republicans last week involves wildly irresponsible, extreme policies. While the document in fact reflects a long overdue leap in the right direction, it is actually excessively responsible and restrained, even timid.

But the Pledge to America is so right when it says:

In a self-governing society, the only bulwark against the power of the state is the consent of the governed, and regarding the policies of the current government, the governed do not consent. An unchecked executive, a compliant legislature, and an overarching judiciary have combined to thwart the will of the people and overturn their votes and their values, striking down long-standing laws and institutions and scorning the deepest beliefs of the American people. An arrogant and out-of-touch government of self-appointed elites makes decisions, issues mandates, and enacts laws without accepting or requesting the input of the many.

In fact, we are losing our country, and if the people do not rise up and stop it, America will indeed soon be just another country, just like Greece, as President Obama suggested on his Apology for America Tour through Europe last year. As the Pledge to America states:

Rising joblessness, crushing debt, and a polarizing political environment are fraying the bonds among our people and blurring our sense of national purpose…. The social fabric that binds us as citizens, families and communities is unraveling. Voices in and out of government whisper that our standing as the world's leader of democracy and economic growth is ending.

Indeed, that whispering of America's decline is not just here at home, but even more so abroad, among our gleefully plotting enemies and our increasingly worried friends.

President Obama's claim that the Pledge to America endorses $4 trillion in tax cuts with only $16 billion in spending cuts is as accurate as his economic policies have been effective. The Pledge promises, "With common-sense exceptions for our seniors, veterans, and our troops, we will roll back government spending to pre-stimulus, pre-bailout levels." That would reduce federal spending by at least $100 billion in the first year alone, over a trillion dollars over 10 years. The budget caps they propose would ultimately reduce federal spending by one-fifth from current levels relative to GDP, returning to the spending levels "during the Clinton and Bush years, when spending was 19.7% and 19.6% of GDP, respectively," as Edward P. Lazear discussed in the Wall Street Journal on Monday.

The Pledge to America also promises "to repeal and replace the government takeover of health care." That would save another trillion in spending over the next 10 years, and nearly $3 trillion over the next 20 years, at least. Additional spending savings would result from "imposing a net hiring freeze on non-security federal employees" and from "ending bailouts permanently, canceling the Troubled Asset Relief Program (TARP), and reforming Fannie Mae and Freddie Mac."

In contrast, under Obama's and Pelosi's responsible, middle of the road, socialist Democrat party control, "For the first time in modern history, the House failed to pass or even debate a budget, allowing spending to continue to grow at a breathtaking rate without any blueprint for making final decisions." Consequently,

Over the past three years [when the Congress has been under continuous Democrat control], non-security discretionary spending has increased a staggering 88 percent. As a result, we now borrow 41 cents of every dollar we spend, much of it from foreign countries, including China, and leave the bill to our kids and grandkids.

The Pledge to America should have gone on to propose extending the highly successful 1996 welfare reforms of the old AFDC program to the remaining 184 federal means-tested welfare programs, restoring the original federalism by sending welfare back to the states. It should have called for bringing back as well Newt Gingrich's Freedom to Farm reforms of the 1990s, which would have phased out federal farm subsidies if continued. And it should have endorsed at least starting Rep. Paul Ryan's personal accounts for Social Security. These policies would dramatically reduce federal spending in the long run.

But taxes is actually where the Pledge to America is the most excessively timid, promising primarily to extend the Bush tax cuts to all Americans. Given that the top 1% of income earners already pay more in income taxes than the bottom 95% combined, President Obama's tax increases for upper income earners will not raise any significant revenue on net, let alone the $700 billion Obama suggests, as Richard Rahn so cogently argued in last weekend's Wall Street Journal. Indeed, if those comprehensive tax rate increases for every major federal tax go through, and produce another, double dip recession, as both Art Laffer and I believe they would, the result will be a dramatic loss of overall revenues on net, expanding the deficit by another trillion or more.

To restore another economic boom, the Pledge to America should have proposed cuts in the internationally uncompetitive 35% federal corporate tax rate, reducing it to 15% in return for closing loopholes. A 30% cut in individual income tax rates would lower the top 35% rate to 25%, likely without much in loss of revenue. Even better would be an optional flat tax of 15%.

In addition, the greatest systemic risk to the economy is the Federal Reserve System itself. Not sufficiently recognized outside the record smashing gold and silver markets is that the Fed has recently committed to stimulating lagging recovery by reigniting inflation, which is just sowing the seeds for a future crisis. Crucial to restoring another boom is fundamental Fed reform tying monetary policy to maintaining a stable dollar, preferably through an anchor to gold and other commodity prices.

But such a full-blown Reaganomics policy agenda will have to await Presidential leadership in the next election cycle. That vision is spelled out in Newt Gingrich's latest book, To Save America, to which I heavily contributed, as recognized in the book.

Where Are Obama's New Ideas?

President Obama, however, has mocked the GOP Pledge to America with his trademark, ridicule, Saul Alinsky style, which is only fooling the most gullible these days. On Monday, he said the GOP was still peddling the same old ideas from the past, without one new idea, as he has said over and over on the campaign trail in recent weeks.

But where are President Obama's new ideas? Bringing back the failed, Keynesian, economic policies of the 1970s, or even the 1930s, does not exactly involve inspiring new ideas. With the rising specter of inflation, to go along with the prospects for another, double-dip recession, President Obama's braindead economic policy throwback is just bringing back Jimmy Carter's economic results. If Obama is going to persist with his determination to ignore all experience since 1980, then he should just name Rip Van Winkle to replace Larry Summers as his top economic advisor.

What Obama and the Democrats are offering as a new idea today is to double tax the foreign earnings of American businesses. This is what Obama means when he talks about "ending tax breaks for companies that ship jobs overseas." Current law allows companies to deduct what they pay in foreign taxes on their overseas businesses from their now inevitably higher U.S. corporate income taxes. Obama again misleadingly and deceptively calls this a "tax break for shipping jobs overseas." No other country double taxes the foreign earnings of their corporations as President Obama proposes to do to American companies. Such a policy would just transform American companies with foreign businesses overseas into foreign companies with overseas businesses in America, killing still more American jobs in the process.

Stop the killing. End the war on American jobs. Don't be fooled again. 

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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.