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

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If the over 250k tax base decreases he could just increase the percentage on those still within that tax base.

The working class has not had a reasonable increase in wages to keep pace with inflation, so I would not mind a tax on the wealthy. If only the government could find a way to restrict those benefitting from the tax increases so they become more fiscally responsible. They could start by placing restrictions on the things people can purchase with government assistance.

Posted by SF | Report as abusive

Pretty easy to go negative a couple of days after the election. But the task ahead is quite difficult, and I haven’t read anything from you in the form of suggestions that sound any better than His.

Posted by Steve | Report as abusive

Obama never had a clue on how to deliver all the promises, but then again, to win an election, all you need is promises to desparate voters. Unfortunately, not all Americans are educated enough to tell the difference, the only time they will understand is 6 months down the road when nothing was changed.

Posted by robert | Report as abusive

This article isn’t “going negative”, its a reality check. Unfortunately the expectation is so high, that when many promises get broken, the backlash may be just as extreme. The reality is that this is a global problem, it is not one persons fault (Bush, Clinton, whoever)but an extreme economic cycle. There will have to be priorities, patience and personal sacrifice. If one believes they can sit back, and wait for a President to snap his fingers while proclaiming the magic word “Change”, then they are delusional. Don’t expect anything from the government. Change comes from the people — when they work for it.

Posted by turista | Report as abusive

We’re apparently more than able to sink hundreds of billions into wars, hundreds of billions into companies that dug their own grave, yet you are afraid of $100 billion going to the most deserving of such aid? Sounds like standard trickle down economic rhetoric to me…

Posted by Justin | Report as abusive

SF: How is it fair to simply tax those that are making more money even more to pay for those that aren’t contributing to society? It would make far more sense, and would give more incentive for people to work, if everyone was taxed equally. Those that make more money would still be paying more actuall tax dollars, but in comparision they would be paying the same. Personally, I make under 25,000 a year, and that’s before taxes. Technically I would be considered right on the edge of the poverty level, but it still wouldn’t make things right for those that have worked hard to have their money forcibly taken from them and given to me. Technically, it is illegal for the government to be taking an income tax anyway, unless we are in a time of war. Which, technically, we are not officially. There is an old saying that says: Give a man a fish, and he will eat for a day, but teach a man to fish, and he will eat for a lifetime. This is the ideaology that our country needs to adopt if we are ever to fight our way out of this recession.

Posted by Jordan | Report as abusive

In this article I am having difficulty observing alternative suggestions to Obama’s proposed projects…Commentary seems to be coming from a frusturated Republican after election results but what she’s suggesting is the “follow the way US has been following in the past”. Well that’s the reason why economy is where it is today! Nobody’s suggesting to come up with the perfect picture but at least it needs to work. Question to the Commentor is: while all above are somewhat working for Canada, why not US won’t be able to implement these?

Posted by Emre | Report as abusive

In short, the perspective here is that now is not the time for increased governmental spending to fund these \”programs.\” Rather now is the time to cut back, as most Americans are also doing. Increasing taxes is bad for promoting growth in business and investing. Those in higher income brackets that would have their taxes raised significantly will not be producing from stocks this year either.

Posted by Kevin | Report as abusive

It is easy to tally the costs, and difficult to weigh the future benifits. But unless you consider the benifits arising for those costs you really haven’t provided much of an analysis.

I can’t help but think that improving the situation of 95% of Americans may have significant economic benifits. Certainly increased energy efficiency and stopping the vast outflows of money to purshase and secure energy would also be benificial. Not to mention the benifits from taking a leadership position in addressing global warming.

Posted by ML | Report as abusive

Oh no, reality….
She also didn’t run for President.

Posted by James | Report as abusive

Yes Steve, nice of them to suggest an alternative, not.
I am sure some billions can be recouped from Iraq, for a start.

Posted by bert | Report as abusive

Obama will now need to start dealing with reality, and the lofty rhetoric of his campaign.

Posted by mike | Report as abusive

Obama was elected out of pure emotion and bought his way to the White House by way of record-setting campaign spending. Critical analysis of his record reveals he is a fence-sitter, siding with prevailing popular opinion. He does not make waves but has other people do it for him (Emanuel) so he is able to keep a healthy distance from the fray.

I do not believe he sincerely supports equal pay for women and am thoroughly disappointed by the absence of women on the list of potential cabinet members.

To that, I would add that in spite of her impressive professional achievements, Michelle Obama is reduced to a magnet for fashion commentary. This year the women’s suffrage movement marks its 80th anniversary. If these events are any indication, in all this time, women have made very little progress at all. What a sad statement on our times.

Posted by Tess | Report as abusive

We should continue to lower taxes as trickle down economics guru R. Reagan told us to do.
The lower the taxes the better off we are. Eight years of Bush is the best proof of this solid (or maybe, just maybe soiled) economic approach.

Posted by ira waxmann | Report as abusive

Ah – the view from the right-wing think tank (election results still stinging?). I would guess that Obama is very aware of the current economic conditions.
\”…President Obama would reduce incentives to work and invest.\” this is a common anti-tax fallacy. Absolutely no proof of this, including any references to the Laffer curve.

Yes, it will be difficult to overcome the disastrous presidency of GW Bush.

Posted by Dave | Report as abusive

I never got hung up in the hype surrounding Obama. I admired his charisma and the intellectual power of his spoken word. I, paid strict attention to his message and found him to be all style and no substance. I knew his numbers just didn’t add up. Americans have been crying about the $1T so far on the War on terrorism, and $90B a year in Iraq we are currently spending. Then we get hit with another $825B in bailout debit. Where are we going to get another $1,000,000,000,000 for the Obama social entitlements? Now we hear that he can’t keep his promises. What politician does? I say, thank God for small favors.

Posted by Kevin Baker | Report as abusive

And McCain or any other presidential candidate would have a better hope? What a pointless article. Of course he’s not going to be able to deliver everything. He said it himself.

Posted by gaba | Report as abusive

It should not be a surprise to anyone that after just two days, there are negative comments on the promises he made to get elected……….after following this election closely for the last two years, there were at least $56million voters who were negative on his plans before and on election day. The rules of life apply to everyone……..be careful what you promise, you just might be held accountable!

Posted by Russ | Report as abusive

Who is Diana Furchtgott-Roth anyway? I am so tired of fake media “experts,” quasi-non-governmental pseudo-leadership and academic nutcases being presented as intelligent economic or political commentators. The Bailout is estimated to have robbed about $3 trillion total from middle-class America’s retirement funds. Of course, Obama may have trouble implementing a healthcare program on his first day; however, we could start by cutting Israel’s allowance to $0.00, and using the money to help our own people instead of an unstable Marxist entity in the Mideast. Then, we could end all of the wars (which we are losing anyway), thanks to poor leadership of men like Wolfowitz, who thought that Iraq was going to be a “cakewalk.” It would be a nice start …

Posted by Mary O'Brien | Report as abusive

Is there anything in this article that was not knowable a few weeks ago? Do you enjoy closing the barn door after the horse is out?

Posted by Chris | Report as abusive