– 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.
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...
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Senator Obama, I wouldn’t waste any time listening to the opinion of a woman who was part of the Bush administration’s smashing success of an economic policy. Heck of a job there, Ms. Furchtgott-Roth.
Oh yeah…just what we need, more negativity. Here are more positive thoughts from one who is not suffering the pain of election loss: \”Right now, many commentators are urging Mr. Obama to think small. Some make the case on political grounds: America, they say, is still a conservative country, and voters will punish Democrats if they move to the left. Others say that the financial and economic crisis leaves no room for action on, say, health care reform.
Let’s hope that Mr. Obama has the good sense to ignore this advice\”.
Those are the words of Paul Krugman, here:
http://www.nytimes.com/2008/11/07/opinio n/07krugman.html?em
I WAS a lifelong Republican (55 yrs old), and am now OVER IT. Crooks and wimps should stand aside while they whine.
Wow! The tenor of these replies and the angry, fearful, exposition is something to behold.
Change is coming, fast. We cannot expect anyone to be able to accurately predict the outcomes, except that the former American way of life and standard of living will have to make substantial adjustment.
The wealthy should be happy to make a larger contribution to the well-being of the nation. They have been getting a free pass from the government for many decades. Forget taxes. They should make a donation of their own free will. Now that would be patriotic!
The only way to fix this problem is to end taxes and replace it with control by the congress of monetary policy. Instead of the phony budget founded on phony taxes we will simply monetize all public services (print the money) and then all holders of our currency will be taxed for our national sustenance by the relative dilution of the dollar’s value.
Maybe its time to end the charade of modern economics which is in complete conflict with its own founding principals and the constitution. Let’s get the private Federal reserve out of the equation and have our representatives learn the meaning of the constitution.
Has Ms. Roth studied the Reagan tax cuts of the 80s and the theory of “trickle down” economics? Instead of trickling down the taxes saved were invested in the stock market, fueling unprecedented growth in that sector. This created the 90s business model used by CEOs; the stock price must increase annually, no exceptions. This model became standard practice, regardless of long term corporate health. This rabid concentration on stock price pushed US jobs overseas and what Regan envisioned as an economic boost for the country started the demise of the US industrial base and led to a real re-distribution of wealth in this country. I am a staunch fiscal conservative and a proponent of a flat tax system, but honestly, can the working class be hurt much more?
Well, Nobel laureate Paul Krugman disagrees with you, hyphenated author-person — _vide_ his column in today’s (7.xi.08) _NYT_. I realize that the are-there-no-workhouses anti-Keynesian crowd won’t buy his take — but as you and they have been disastrously wrong about pretty much every macroeconomic analytic for an entire Schumpeterian cycle, why in heaven’s name should we prefer your deployed-and-failed theories to the scarcely-tested ones of our pal from Princeton? Hmmm?
have the people not realized yet that campaign promises are never held once elcetions are over? I keep hearing about record early voters and turnout, but at the same time, I was watching the news and they said ” the west coast polls are now closing and president elect obama”… that is the electorial college at work, not the voters . and the media NEVER mentioned any party but democrat and republican.. maybe if the people and electorial college vote in an American instead of a politician, we might return to our once great status….
He won’t be the first president to not follow through on all of his campaign promises, and he won’t be the last. George Bush Sr. said, “Read my lips, no more taxes” and Bill Clinton promised a tax cut for the middle class. Both were shot down by Greenspan.
Obama is our next president and he deserves ou support and prayers. God bless him and his cabinet.
I am so confused with all the things people are saying. I just pray to God to pull America out of all the troubles…the useless wars, economic crises, increasing unemployment …….all of them.
I wonder how much a chief economist or fellow at the hudsons makes? Maybe this whole article is just trying to reduce her tax burdens. Why should she have to pay for people who don\’t work as hard as she does. How hard could it be? Pay for colleges with government loans then work for the government to pay off or write off those loans, then convince all the \”right\” people that taxes on the top don\’t make sense, and by the way it is immoral.
I would also say, I was very dismayed at his demeanor during his first press conf. He did not instill any confidence,and even thougn rightfully guarded, I don’t see him as much of a creative thinker on his own. God Bless his team, they will either lift us up, or bury us.
No doubt, the euphoric reaction WILL give way to reality, as it alreadys seem to be doing. His plans will not be realized, without a massive change in the economy, quickly. There is no reasonable way to trigger growth by hurting the upper percentage of incomers, because you cannot spur growth with reduced confidence in this sector. We all would love to see some wealth spread, but not at the expense of those who can produce jobs and goods, and certainly not by taking away from those who struggle each day, just remain where they are. Watch resentment set in quickly among those who may see some $$ flow to those who, in many cases, have made a conscious decision to opt out and take what the government so readily gives out.
We should just stop the money injection for Israel and the war in Iraq. We can’t afford that while our economy is bleeding.
Mr. Obama,
Welcome to Washington! In a surprisingly ironic moment at his first post-election news conference, our community organizer in chief demonstrated himself a poor student of history. While the consequences of tax and spend and class warfare are sitting on our country’s economic shoulders, he has the chutzpah to stand the failed Governor of Michigan and its dragging unions at his side. He seemed to have a very stuttering and stammering style without the teleprompter, too. He should have taken he middle road and called out the failed big three for their mismanagement, the Governor for her complacency, and the unions for uncompetitive business model. That would have been something to line up behind!I’m reassured he realizes that choosing the presidential dog is a “pressing issue”. I feel safer already!
I am leary of anyone who wants more of their money going to the government. Who in their right mind does not want to keep more of what they EARN. The government isn’t earning any of MY money, sticking their grubby hands where they don’t belong like the bailout and economy and public education and healthcare. These are all STATE concerns not the national government.
@Justin: Let’s hear it for trickle-down economics, without which what would we have? We would have had the continual economics of Jimmy Carter’s era? Not survivable - a disaster. I assume you were not alive during the Carter Admin, and your naivety is one of youth not indoctrination. I assume you just don’t know what the alternative would have been in the 1980s, and why trickle down can work, BUT ONLY if government and corporations aren’t feeding off of each other.
That is what led to the meltdown we see now. CRA and Fannie Mae, out in front. You want the government to be larger? Do you know who the biggest group is regarding donations over the last 20 years is? State and local workers. So ask yourself, who are you listening to? Self-interested govt workers or practical economics?
The sensible idea in trickle-down econ. is that letting the wealthy INVEST benefits the economy at large. I’ll take that any day over socialism, thanks. And socialism, a government-controlled and -run economy from top to bottom, is what we’d have had if Jimmy Carter’s ways had kept going. What’s between those two? Just bigger government. And if you think more government is indeed the answer, and not simply better oversight (you can thank a Democratic Congress for failing us, and the GOP-run one prior to it, as far as overseeing mortgages and finance biz), you are incorrect or asking for socialism. Simple.
On the homepage of Reuter’s. Who is this?
Perhaps a Fox News analyst looking for work now.
Here’s a reality check for you: Having lived beyond our means for years, we can no longer afford to project our interests around the world by force. The up-front cost of the Iraq and Afghanistan wars–a perpetual state of emergency–is several hundred billions of dollars each year. Veterans care and other downstream costs, already outstripping our resources, grow by leaps and bounds each year the wars continue. We must abandon these wars. Increased Iranian and jihadi influence? Six years ago, intelligent policies could have headed that off, but now, it’s just too bad. We’ll do what we can with the force of our example, but the example of force must be left to other, richer countries, or left undone. Having accepted this fact, we can afford to protect our land and get on with Obama’s objectives.
I am disgusted by the ignorant. Dump Israel support? What are you, anti-Semite or just a sucker for Palestinian terrorism? Because those are from where that suggestion comes, @Mary O’Brien. You may think you are sympathetic to “everyday” Palestinians, but you simply don’t know history, most especially of how hard Israel has tried to be reasonable while under constant assault. Your suggestion would result in one thing, you ignorant apologist for terrorists and anti-Semites: an attack and slaughter on Israel. So get out of you cushy world and have a look around. The world that you live in is not the world that exists outside of your tiny little fantasy of Israeli “aggression”.
GET A BLOODY CLUE, all you “stop funding Israel” idiots, or admit you are anti-Semitic, anti-peace, and pro-Arab (at cost of the Jewish State). Call your hate what it is, don’t dress it in Palestinian sympathy. I sympathize with the plight of the Palestinians, and the Israelis generally do, also. Fact is, though, some factions of Arabs and Islamists are USING them. So, don’t buy the hype, you fools!
This was indeed a historic period in history, without any doubts. President Obama has wonderful ideas that will hopefully get things jump-started in the right direction, but one thing that really gets to me about our country is that the majority of people here less a small number, live day in and day out in a delusional fantasy world. The Obama honeymoon celebration will be over soon and by then, more will have lost their jobs, more money lost in the economy, murder, theft, death, declassification all will still remain and even worsen. This is all an ILLUSION folks. Open your eyes to the real world and stop worrying about appearances and impressions and where your next latte will come from. There are real human beings with real families suffering real problems and either there are iron-clad solutions for this or our very being will continue to spiral. And I am in fear that a lot of this is way over president Obama\’s head.
This calculation doesn’t include the amount of money spent on the economy from those getting the fiscal incentives. For instance women who will get the higher pay are likely to spend it on goods and services and stimulate the economy.