After victory, a reality check for Obama

November 7, 2008

diana-furchtgott-roth– Diana Furchtgott-Roth, a former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

By Diana Furchtgott-Roth

Pity President-elect Barack Obama. Today, only three days after his historic victory as the first African-American elected president, the Labor Department announced that the economy lost 240,000 jobs from payrolls in October and that the unemployment rate rose to 6.5%. This underscores the difficulties he faces in raising taxes on “the rich” to fund new spending.

Obama must recognize that his campaign promises are impossible to implement without making the economy sicker. The economy is weak and getting weaker, probably contracting now at an annual rate of 3-4 percent.

Obama’s promises include a combination of tax cuts and welfare for 95 percent of working Americans, an end to America’s foreign oil dependence, a costly healthcare plan, more education spending, and so-called pay equity for women. Much of this is supposed to be funded by levies on businesses as well as tax increases on those making over $250,000.

But, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, Obama’s tax package would cost $2.9 trillion over the decade from 2009 to 2018. That includes increasing the tax rate on capital gains from 15 percent to 20 percent, and raising the top two tax rates, 33-36 percent and 35-39.6 percent, on singles with taxable income exceeding $165,000 and married couples earning over $201,000.

The Tax Policy Center’s estimates do not include the effects of financial market chaos and the stock market decline, which has reduced taxable income. And with the economy worsening, tax increases on upper income earners would net less than the Center projected, increasing the 10-year deficit to over $3 trillion.

Here’s one small example. In 2005, the latest data available, the Internal Revenue Service recorded 3.5 million returns with $200,000 or more. About half those returns had capital gains income, which averaged $304,000, netting approximately $80 billion in taxes annually.

These revenues will be reduced by weak stock markets—as well as by disincentives to invest stemming from higher taxes. In addition, many Americans are losing jobs, meaning not only less wage and salary income to be taxed but increased government payouts for unemployment benefits.

As president, Obama will have difficulty paying for new projects such as an incremental $65 billion health care plan, a $30 billion addition to the Medicare prescription drug plan, and $37 billion in increased education and research spending—all estimates for one year.

The bill for some other proposals would go to employers, who are already struggling to survive the recession. Investments in alternative energy and electric vehicles, for instance, would be funded by requiring purchases of permits to emit carbon, estimated to raise $56 billion annually.

Obama would also require most employers to offer paid sick and maternity leave, vacation, and parental leave for school visits. Employers would be penalized for paying women less than men for “equivalent” jobs, however they are defined.

Of course, in a recession, federal deficits are desirable. The question is how to structure them to help the economy recover. By increasing taxes on upper-income earners, small businesses, and capital gains, President Obama would reduce incentives to work and invest. Additional requirements on employers would encourage them to open plants overseas, rather than in America, slowing job creation.

After the euphoria in the streets and the chants of “yes we can” have faded, the question will remain: do Obama’s promises make fiscal sense?

Diana Furchtgott-Roth can be reached at dfr@hudson.org.

92 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

DFG: “As president, Obama will have difficulty paying for new projects such as an incremental $65 billion health care plan, a $30 billion addition to the Medicare prescription drug plan, and $37 billion in increased education and research spending—all estimates for one year.”

Well, cutting the cost of the Iraq war would surely help. In FY 2007, $133 billion, in 2008 probably roughly the same. Your figures come up to $132 billion. With a fraction of the the billion left over, you could finance another think tank – one on how to end America’s Third World inequality.

Posted by Costcutter | Report as abusive

The ROOT CAUSE of America’s predicament is DEBT, pure and simple, Mr. & Mrs. Reader.

The present massive national debt of some $13 Trillion began with the Reaganomics of 1981-89…continued with the first Bush administration (1989-93)…and brought the second Bush administration of 2001-Present (along with the country) to its economic knees, e.g., the Dow Jones Industrial Average dropped precipitously from 14,000 to 7,500 within a few months, and several Wall Street firms and banks collapsed overnight. Reaganomics (accompanied by Bushonomics) is an utter & dismal failure.

Even Clintonomics failed in the sense that it did not boldly and completely eliminate the national debt by taxing the privileged class and super privileged class as intended by the Revenue Act of 1913 (i.e., by not raising the top marginal rate beyond a mere 39.6%). However, 1993-2001 gave America the heady days of prosperity and an expansion of the middle class…as well as the balancing of the budget and the halting of borrowing from the middle/working class social security trust fund to mask the budget deficit.

The second (and by far the worst) Bush administration claims ignorance of the root cause (i.e., debt), and has simply added to it by throwing more borrowed money down the black hole, i.e., the $1+ Trillion bailout of Wall Street, AIG insurance, banks, airlines, the auto industry, etc. The high profile, right-wing socio-political-economic Fox Network is scrambling to find its footing, while also dancing around the root cause. Ordinarily you would not hear from low profile wealthy folks. However, privileged class millionaires and super privileged class billionaires are coming out of the woodwork with suggestions on what to do…always with the specter of the IRS coming after their vast wealth constantly in the back of their minds (actually, right on their very heels).

Furchtgott-Roth: “…First…give unemployed workers an additional tax-free sum, perhaps $5,000…Second…200,000 visas could pour $60 billion (into real estate markets)…Two hundred thousand visas is less than two tenths of one percent of our 155 million labor force…Third…drill…the Arctic National Wildlife Refuge, the Outer Continental Shelf…raising $50 billion…Finally…set capital gains rates at zero for the next five years…At the same time…make current tax rates permanent rather than having them rise on January 1, 2011…”

From the middle/working class ditch (filled with economic storm runoff) that I’m presently standing in…and looking up at the ivory tower where the writer does her thinking…I am simply astounded to read nothing useful about treating the ROOT CAUSE of America’s domestic economic predicament, i.e., DEBT. Likewise, there is nothing about America’s unaffordable foreign military conflicts, which are part & parcel of that same root cause.

The writer’s first suggestion is a drop in anybody’s bucket. Just how far does she think that $5,000 will take an unemployed household in the watery ditch where I’m standing? The second suggestion is politically dead on arrival, when upwards of 10% of Americans are out of work, or are no longer even being counted by the federal government. The third suggestion won’t bear fruit for at least 10 years.

The writer’s final two suggestions are the traditional fallback for those think-tankers who just can’t get it out of their heads that Reaganomics has NEVER born fruit for America’s middle class…the middle class that has been shrinking (and the working class that has been growing), since Mr. Reagan was swept into office in 1980 with a mere 50.7% of the popular vote. They called that a mandate because he was rewarded with 489 electoral votes.

Mr. Reagan received 525 electoral votes in 1984, and a real mandate of 58.8% of the popular vote. That mandate sowed the bitter seeds of the watery economic ditch that middle/working class Americans are standing in up to their waists at this very instant. Why? Because that unfortunate mandate immediately produced a top marginal rate of 28%, compared to the 50% rate handed over to the wealthy by Reaganomics in 1981. Even the bottom rate for the middle/working class was increased from 11% to 15%. Thereafter, and until the present day, the national debt (except briefly during the Clinton administration) and annual budget deficits have been growing almost exponentially.

The Reaganomics solution: BORROW, borrow, borrow & borrow some more…or as Ms. Furchtgott-Roth expresses in her original article, “Of course, in a recession, federal deficits are desirable. The question is how to structure them to help the economy recover. By increasing taxes on upper-income earners, small businesses, and capital gains, President Obama would reduce incentives to work and invest. Additional requirements on employers would encourage them to open plants overseas, rather than in America, slowing job creation. After the euphoria in the streets and the chants of “yes we can” have faded, the question will remain: do Obama’s promises make fiscal sense?”

Personal income; small business net profits & capital gains profits are going to continue to be taxed. That’s the present reality for the middle class & working class (although unfortunately not within the letter or spirit of the (democrat) Wilsonian Revenue Act of 1913 that came out of the (republican) Taftonian 16th Amendment to the Constitution).

DEBT SOLUTION: A line should be drawn at $250,000 for married couples & $125,000 for singles (after personal exemptions/itemized deductions & capital gains buy-sell expenses). This line includes small business net profits and corporate net profits (after legitimate business expenses). Overseas profits should be taxed. Nonsensical loopholes should be closed. I’m addressing $250,000/$125,000 in TAXABLE income, NOT gross income…a distinction not made by Mr. Obama.

Regardless of the present 10%, 15%, 25%, 28% & 33% rates and their various and easily changeable thresholds…the AGGREGATE tax burden for individuals & small businesses below the $250,000/$125,000 line should be no more than 15% (currently 24.5%). For those Ronald Reagan fans, I bring you the symbolism of the 15% bottom rate contained in the Tax Reform Act of 1986, which eliminated the 11% bottom rate.

The present top marginal rate of 35% should be increased up to the pre-Reagan (1964-1980) top rate of 70% for every additional dollar of taxable income for individuals above the $250,000/$125,000 line and for small businesses above the $250,000 line. On the other hand, the corporate top marginal rate should be raised to at least 50% for each additional dollar in net profits over $250,000. The present 32.3% aggregate tax burden for net corporate profits below $250,000 should continue. The aggregate corporate tax burden for net profits above $250,000 is a mere 35%.

The preceding goes directly to the ROOT CAUSE of America’s fiscal and financial predicament, i.e., the astounding $1 Trillion deficit for FY 2009, and the overall $12 Trillion national debt (contributed to by the drain on the treasury caused by America’s counterinsurgency entanglements in Iraq, Afghanistan…and now northwestern Pakistan).

The letter and spirit of the Revenue Act of 1913 was that the privileged class would pay America’s bills and minimize her debt…while the middle class would consume with tax free dollars, thereby growing & prospering while shrinking the working class. A large and growing middle class creates prosperity for the privileged class.

I have absolutely no problem with the privileged class growing and prospering…BUT not while the middle class is shrinking and struggling. When only the former occurs, that is Reaganomics. When both the former and the latter occur, that is the Taftonomics derived from 1913′s 16th Amendment, and the Wilsonomics derived from the Revenue Act of 1913..

I refer you to my comments of November 8th, Mr. & Mrs. Reader.

OK Jack MBA
Disabled American Veteran
oklahomajack.com

CORRECTION: I have absolutely no problem with the privileged class growing and prospering…BUT not while the middle class is shrinking and struggling. When only the former occurs, that is Reaganomics/Bushonomics. When both the former and the latter grow & prosper, that is the Taftonomics derived from 1913’s 16th Amendment, and the Wilsonomics derived from the Revenue Act of 1913..

I refer you to my comments of November 8th, Mr. & Mrs. Reader.

OK Jack MBA
Disabled American Veteran
oklahomajack.com

You look like a parrot, and your names a mouthfull but i like you, you make allot of sense. I’m all for cutting corporate taxes and improving the value of the american investment for the sake of nationalism.

however, folks on the right are always worrying about the weatlhy being abused until they can’t do their economic function, but what about the quality of american workers? undereducated, underqualified, and under-employed unless they have a union which makes them rediculously overpaid. each of these people is a waste, a waste of human potential and economic productivity. you want to talk about “disincentives to work and invest” try surviving off three min wage jobs for 30 years knowing full well you’l never be able to go to school and improve your value as a worker because you can barely pay the rent as it is. without help from somewhere you’ll be stuck their and never live up to your potential contribution to the economy. I agree with you that we shouldn’t make it more expensive to hire americans, but shouldn’t we look to making american labor valuable to begin with while looking at its cost. (with a sneer of elitism) or better yet bring in boatloads of imagrants from latin america and elsewere, they’ll work their butt off just like my great grandfather did. the rewards of educating them are greater than the cost.

Posted by John J. | Report as abusive

All I have to say is, if Obama manages to pull this off and get America going in the right direction, I hope you doubters and Republicans come out and say you’re wrong, which most likely won’t happen. Besides, that, it’s easy to criticize when Obama hasn’t done anything yet. When he starts doing something and if fails miserably, then voice your outcry, but stop with all this speculation. The way I understand it is, Obama is just trying to jumpstart America, so the rest can be left to us to make it grow. Wants wrong with that? It wouldn’t have been a walk in the park if McCain was wearing the shoes.

Posted by Trasa | Report as abusive

To those who talk disparagingly of “TRICKLE DOWN ECONOMICS”

The last time I looked, it was only people with money and a dream who started businesses. The people who start businesses employ people to whom the success or failure of the entrepreneur means a job. Of necessity, the entrepreneur expects to make a return on his investment or takes a loss if his business does not succeed. The people he employs benefit from his success from having a job if he/she succeeds. In big corporations, the owners are stockholders, most of whom are people like you and me. So, when we stockholders are the owners, the employees of the corporations are our employees to whom we “trickle down” our success. I have not yet met a stockholder who did not want his/her stock to go up in value and give increasing returns each year. If stockholdres are greedy for more, then the trickle down to the employee is less.

Look at what happened to the steel, clothing, shoe and other manufacturing industries. The “TRICKLE UP” did not happen due to stockholders and employees and employee unions both wanting higher returns/salaries, nor will it. The stockholders are the driving force and their expectations are what caused the outsourcing.

So, without “TRICKLE DOWN”, there will not be any new jobs. Any politician, Democrat or Republican, who promises job creation would have to find a way to balance the WANTS of owners and employees against their true NEEDS.

So, please quit using “TRICKLE DOWN” economics as a dirty word.

Posted by ClementW | Report as abusive

The ‘trickle-down’ fallacy returns. I’m confused over her use of the term ‘costs’ to describe taxes; they would be costs to taxpayers, but revenue to the government. And yes, in recessions, tax revenues go down. If more people are unemployed, you earn less in income tax receipts. But increased public spending would increase employment. Buying a car directly helps employment; buying stock does not. But let’s suppose investing does indirectly help employment by lowering the cost of capital. People don’t invest to increase employment; they invest to make more money. Why would I buy GM stock (good for US employment) when I can buy gold (inflation hedge) or an expanding Chinese manufacturer (more profitable)? And if I make over $250k a year, would I stop investing because my capital gains taxes went up? Would investors suddenly start hiding money under mattresses? As for the ‘earned it’, it would be hard to make that claim if you removed everything the government did to create the environment that allowed you to earn it. Why do the unregulated portions of the economy (Savings and Loans, credit risk default swaps, hedge funds, Enron’s off-book practices) seem to fail and need bailing out, but we keep looking to the ‘magic of unregulated markets’ to fix our economic ills?

Posted by Mike | Report as abusive

Some commentators have likened Obama and his proposed policies to Robin Hood. I can’t agree, Obama is not Robin Hood — Robin Hood didn’t take from the ‘rich’ and give to the ‘poor’ — he took from the plunderers and returned to the producers — Obama’s proposals as laid out in the article would make him a robbing hood not a Robin Hood — he’s actually the Sheriff of Nottingham.
Introducing a carbon cap and trade scheme and increasing energy regulaton/taxation will simply raise the cost of energy. This is highly regressive and will impact lower income people the most. The idea of obtaining all sorts goodies by taxing the ‘rich’ won’t work — incidentally the current deflation is rapidly reducing the number of ‘rich’. Wealth is not created by printing a bunch of funny looking pieces of paper or confiscating people’s savings and labor — wealth is created by allowing men’s minds and attitudes to produce and create new ideas and technologies — this does not happen under confiscatory totalitarian regimes — this happens best in free societies where people are allowed to keep the fruits of their labor and people respect each other’s property.
Incidentally, those who have no substantive points to make, usually attack a person’s character rather than their conclusions — the author wrote a reasonable critique of Obama’s putative policies — respond to her theses — attacking her character just makes you out to be an idiot .

Posted by Canadian who's seen enough socialism | Report as abusive

Editor,

Doesn’t this say something about how opinionated this column was?

My two cents:

Those who make more money are not necessarily “more productive”. There is limit to the productive capacity of man, it may vary but there are limits. The man making millions cannot squeeze enough lemons at $100 a lemon to make his money in one year. Most of that wealth is ill gotten, piggybacking the work or productivity of others.

In a true free market that would not happen, but don’t those conservatives tell us Utopia is a dream. Well, so is true free market.

I just wanted to vent on the absurd premise of the article =(

Posted by Himanshu | Report as abusive

Diana, your ideas are unbelievably off the economic sense.

How trading green cards for houses will resolve the problem that the houses are actually overpriced? At least Poulsen figured it out and backed off the mortgage repurchase idiotism. By the way, at present there is oportunity for obtaining US citizenship in case a person contributes over 2 million capital in the economy. And many Indians become Americans :) that way; so that idea is already done, but the sale price is 2 million, not yours miserable 300 000. And, obviously even this is not enough.

Think also like this – when many many people become hungry and desperate, they don’t have other choise but to take the wealth they need. In that case, you having wealth would be better off contributing voluntarily prior that by higher then otherwise taxation. It doesn’t sound right maybe, but that is life, whoever is stronger at some point takes everything.

Posted by Ananke | Report as abusive

I am afraid that the underlying value-judgement behind Diana Furchtgott-Roth’s whole argumentation is that the globalisation agenda and the apparent sympathy that the Obama camp has for continuation of the Bush administration support for free trade is what leads her to argue as she has. She is ready to factor-in the depressing effect on fiscal revenue generation of a slowing economy, but she does not account either for the freeing of funds from a reduction in military spending or for the multiplier effect on job creation and income generation of the fiscal spending on public works. Sure enough, the fiscal deficit might be pushed to fluctuate somewhere between 6% of GDP and 7% of GDP during the initial years of the next decade and becoming steadily reduced to about 2% by 2015 and yielding a small surplus by her target date of 2018, but all this is doable with discipline, international cooperation or coopetition instead of confrontation, and technological advancements that are never factored into such projections because judged not quatifiable.

Posted by Mohamed MALLECK | Report as abusive

I actually think that her opinion is absurb about this situation because with her intelligence, she is not using any of it. There are greedy company owners who actually made their wealth using the employees’ work as their work. And they should contribute a little more for our country instead of holding back because they want a luxury life to keep and for them to not have to do the “hard-work” that they make their employee do. I believe we should try to help each other out during this financial crisis that we are going through and it’ll benefit us all. If we still have these greedy, stereotypical people with a very high income still believing that having more money will make the world go round. I want them to see how they’ll look when their greediness ends up not helping them if our country ends up in another depression, not that I hope that’ll actually happen to us, but just in theory.

Posted by Tashara | Report as abusive