Bud­get­ing against growth

The Washington Times Weekly - - Commentary - Don­ald Lam­bro

Pres­i­dent Obama’s big spending 2010 bud­get is filled with tax pro­vi­sions that will stunt eco­nomic growth, job cre­ation and new busi­ness for­ma­tion.

It is bad enough that his soak­the-rich tax in­creases will have a neg­a­tive im­pact on or­di­nary work­ers, but worst of all, he will raise them while the U.S. econ­omy is still in a re­ces­sion or in the dif­fi­cult process of at­tempt­ing to climb out of one.

Mr. Obama in­tends to keep all the Bush tax cuts ex­cept the two top tax rates that he will let ex­pire at the end of 2010, a year af­ter the White House says the econ­omy will have shrunk by at least 1.2 per­cent and likely a lot more.

This means that com­ing out of a deep, re­ces­sion­ary 2009, when the Fed­eral Re­serve fore­casts un­em­ploy­ment will shoot to 9 per­cent or more, Mr. Obama will be rais­ing taxes on in­vestors and small busi­nesses — the very peo­ple who cre­ate jobs.

This will be the bleak re­sult of let­ting the two top in­come tax rates rise in Jan­uary 2011: from 33 per­cent to 36 per­cent and from 35 per­cent to 39.6 per­cent, or more than 40 per­cent when state taxes are added). But how does this af­fect or­di­nary Amer­i­cans?

“Ac­cord­ing to In­ter­nal Rev­enue Ser­vice data, half of all busi­ness in­come is taxed at in­di­vid­ual rather than cor­po­rate tax rates, and about two-thirds of all flow-through busi­ness in­come is earned by small busi­ness own­ers with an­nual in­comes ex­ceed­ing $200,000,” says eco­nomic ad­viser Ce­sar Conda. “The bot­tom line: Up to one-third of all busi­ness in­come is taxed at the two mar­ginal rates Obama wants to raise,” Mr. Conda is telling his busi­ness clients.

With the un­em­ploy­ment rate at 7.6 per­cent, the high­est in 16 years, this is no time to raise taxes on small busi­nesses, the en­gine of job growth in the coun­try. Or even tele­graph­ing that he in­tends to do this at this end of the year.

“Pres­i­dent Obama may pro- pose tax hikes that do not take ef­fect un­til 2011, but the fact is they al­ready are de­press­ing eco­nomic ac­tiv­ity in the mid­dle of the re­ces­sion,” says Ali­son Acosta Fraser, di­rec­tor of the Her­itage Foun­da­tion’s Roe In­sti­tute for Eco­nomic Pol­icy Stud­ies. “Fac­ing higher fu­ture taxes, busi­nesses, in­vestors and savers re­duce their ac­tiv­i­ties to­day,” she says in a re­cent study.

But Mr. Obama’s de­mands for more tax rev­enue doesn’t stop there. He wants a 2 per­cent to 4 per­cent pay­roll tax sur­charge on tax­pay­ers earn­ing more than $250,000 to boost So­cial Se­cu­rity sur­pluses (which the gov­ern­ment spends). And he wants to re­strict the item­ized tax de­duc­tions for this same group of tax­pay­ers, which would push their in­come tax rate up an­other 7 points.

Mr. Obama’s rosy eco­nomic growth pro­jec­tions for next year have raised eye­brows among many economists who think we are in for a pe­riod of slow growth com­ing out of this re­ces­sion, es­pe­cially if his dra­co­nian tax in­creases are en­acted.

In a cook-the-books ef­fort to boost fu­ture rev­enue num­bers to make it look like he will cut the deficit in half, his bud­get pre­dicts the econ­omy will grow by an as­tound­ing 3.2 per­cent in 2010, fol­lowed by an even stronger 4 per­cent growth in 2011, then 4.6 per­cent in 2012 and 4.2 per­cent in 2013.

In re­al­ity, the con­sen­sus fore­cast by Blue Chip Eco­nomic In­di­ca­tors last month pre­dicted that the gross do­mes­tic prod­uct would fall by nearly 2 per­cent this year, and rise by an ane­mic 2 per­cent in 2010, and about 2.9 per­cent in 2011 and slightly less there­after.

Eco­nomic fore­cast­ers fore­see the econ­omy re­bound­ing in a U rather than a V shape. “I think this down­turn is go­ing to last longer and the re­bound will be fairly ane­mic,” Cal­i­for­nia State eco­nomics Pro­fes­sor Sung Won Sohn told the As­so­ci­ated Press.

The sharp fourth-quar­ter down­turn deep­ened the re­ces­sion­ary out­look for the fore­see­able fu­ture. Leg­endary in­vestor War­ren Buf­fet says, “The econ­omy will be in sham­bles through­out 2009 — and, for that mat­ter, prob­a­bly well be­yond.”

The econ­omy may make a come­back of sorts in 2010, but it prob­a­bly will be in the re­cov­ery stages for some time to come. This means the econ­omy will need all its oars in the wa­ter pulling at the same time. That means lower tax rates across the board and post­pon­ing any large, costly so­cial pro­grams like health-care re­form un­til the econ­omy is on solid foot­ing.

Even Democrats in Congress com­plain about Mr. Obama’s bud­get pro­pos­als.

Se­nate Bud­get Com­mit­tee Chair­man Kent Con­rad, North Dakota Demo­crat, has been one of the chief com­plain­ers. “I am con­cerned about the long-term buildup of debt,” he said last week. He also doesn’t like some of the pres­i­dent’s tax in­creases on wealth­ier Amer­i­cans such as cut­backs for tax de­duc­tions for char­i­ta­ble con­tri­bu­tions. “I would put that high on the list of things that will be given a thor­ough scrub­bing and may well not sur­vive.”

So it’s not just Wall Street that has given Mr. Obama’s eco­nomic poli­cies a huge vote of no con­fi­dence. Democrats have their doubts, too.

Don­ald Lam­bro, chief po­lit­i­cal cor­re­spon­dent of The Wash­ing­ton Times, is a na­tion­ally syndicated colum­nist.

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