James Pethokoukis

Politics and policy from inside Washington

Here comes the healthcare surtax!

Jul 10, 2009 22:41 UTC

From The Hill:

The House will propose raising taxes on people earning more than $350,000 a year to pay $540 billion for healthcare reform, Ways and Means Committee Chairman Charlie Rangel (D-N.Y.) said Friday. … Rangel said Democrats will seek to enact one large tax increase targeting wealthier workers to generate the revenue they need to finance their $1 trillion-plus healthcare reform bill. “We have decided that instead of putting pieces of different revenue raisers together, that the best that we can do [is] we would have graduated surtaxes starting at [$]350],000],” Rangel said. The tax hikes would begin in 2011 and raise $540 billion over 10 years, he said after a meeting with Democratic committee members.

My spin: The Californication of US economic policy continues as a smaller and smaller group of taxpayers shoulder more of the tax burden. Also, one more reason why American might suffer a Lost Decade of subpar economic growth.


Is anyone paying attention here!?! Will we have the America we all know when this guy is done wrecking EVERYTHING and driving us into the ground? Me thinks the odds are against it. Sad, just sad.

Thanks for nothing Obama voters!

Btw James, great blog, how Reuters (read: yet another leftist media outlet) allows you to write this stuff is beyond me. By all means, keep it up as long as you can. Please.

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Does the U.S. need a dose of Viagra economics?

Jul 10, 2009 17:53 UTC

The Obama presidential campaign was one of the all-time great branding efforts, from message to packaging to platform. So how disappointing it must be for the Obama administration that its signature achievement so far, the $787 billion American Recovery and Reinvestment Act, has been utterly misunderstood by the American public.  Listen to what megabillionaire Warren Buffett, an unofficial Obama economic adviser, had to say earlier this week: “Our first stimulus bill, it seemed to me, was sort of like taking a half a tablet of Viagra and then having also a bunch of candy mixed in … It doesn’t have really quite the wallop that might have been anticipated there.”

And apparently the Oracle of Omaha isn’t the only person disappointed by the lack of a priapic jolt. A recent Rasmussen poll found that 45 percent of Americans think so little of the results so far that they want the rest of the new government spending in the plan canceled, compared to 36 percent who disagree and 20 percent who aren’t sure.  Not surprisingly, 60 percent oppose a second stimulus plan, against 27 percent in favor. Been there, done that, didn’t get much out of it.

But the Obama plan was never meant to be Viagra. It was designed so that three-fourths of the spending would occur after 2009.  Now the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan. And while government spending on infrastructure projects may provide more stimulus per dollar spent — at least this is what Team Obama believes — it is slower to come on line.  Even the name of the plan was designed to send a “be patient” message. It could have been called the Get America Moving Act or the American Job Creation Act, but those titles would have been tremendously out of sync with what the ARRA was actually intended to do: boost the economy and jobs over the course of a long recession while also providing a downpayment on Obama’s healthcare, energy and education agenda. A two-for-the-price-of-one sort of deal.

And that political and economic calculus might have worked had the economy not fallen off a cliff. The unemployment rate is already higher than the administration’s worst-case scenario from last January and perhaps headed higher than the worst-case scenario found in its stress test for the banks.

And rising joblessness has joined with the housing crisis to create a vicious economic circle. Given all that, a pure dose of Viagra economics for the economy doesn’t sound like such a bad idea right about now, perhaps in the form a massive payroll tax cut.  “The payroll tax cut of US$400 billion that we advocated last fall, if enacted in February, would likely have pushed us out of recession by now,” argue Morgan Stanley economists Richard Berner and David Greenlaw in a new research note. Instead, American got a program that was “heavily back-loaded and full of spending that is unlikely to be stimulative.”

Or perhaps with business and investor confidence so depressed, we need some Prozac economics, via a cut in corporate and capital gains taxes.  At this point, the White House seems inclined to do none of the above, arguing for a wait-and-see approach, given than only 10 percent of the “stimulus” money has been pushed out the door. Maybe Team Obama fears a nasty bond market reaction at the prospect of even more government spending? Perhaps, though deflation rather than inflation seems in vogue among Wall Street worries.

But if a bond vigilante revolt is a concern — and it probably should be a consideration — why not combine a second stimulus with a plan to fix Social Security by moving back the retirement age and indexing benefits to wages rather than inflation?  Such a move would turn the program’s long-term deficit into a surplus and show the United States is serious about fiscal reform.

In any event, cutting taxes seems to be nowhere on the congressional agenda. For instance, higher taxes on incomes and capital gains are being floated as one way to pay for healthcare reform. But as the jobless rate continues to rise — Buffett thinks 11 percent isn’t out of the question — both the White House and Congress might finally start reaching for the pills.


“the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan”

7 %?

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The all-powerful consumer? Feh. Boost business …

Jul 10, 2009 17:42 UTC

My colleague, confidant and occasional kick-boxing sparring partner, the fantastic Felix Salmon is worried about what comes the Day after Tomorrow:

While previous recessions were part of economic cycles within a certain economy, what we’re going through right now is a painful disruption from that economy to something else. I fear that the flat or declining median wages, however, might well survive the transition — at least so long as unemployment continues to remain as high as it is now. Which is one reason not to worry overmuch about inflation: if consumer spending accounts for 70% of the economy, and consumers don’t have any money, it’s really hard for prices to rise very quickly.

Well maybe we should quit worrying about the banks and The Consumer and pay attention to a different sector of the economy (via another friend of mine and occasional kick-boxing sparring partner, Larry Kudlow):

So here’s a novel thought for all the geniuses down in Washington. Help businesses for a change. You can begin by stopping the taxing of overseas corporate profits. Do not hike the minimum wage. Back off cap-and-trade. Do not nationalize health care. Stop the anti-trust assault on phone companies, pharmas, Google, airlines, and multi-nationals.

And how about a six-to-twelve-month payroll-tax holiday? That would make it cheaper to hire new workers. What about a corporate tax cut? And immediate cash expensing for business-investment write-offs? In other words, cut the tax cost of hiring, investing, and doing business. Because it’s businesses that create the jobs and the incomes for families all throughout America.

And if you are still worried about the housing story or bank toxic assets, how about a capital-gains tax holiday?

Does anyone in Washington understand the way the world really works? It’s called incentives. That’s what this is all about. And we’re going to need many more of them if businesses, investors, and families are to start prospering once again.

Is Falling America losing out to Rising China?

Jul 10, 2009 17:15 UTC

There was a bit of a kerfuffle about the new Fortune global 500 rankings which showed  that the number of U.S. businesses fell to lowest level ever while more Chinese entries appeared than ever before. A few thoughts:

1) While I realize what the trendlines are, remember that there were still 140 U.S. companies on the list. That is almost as many as China (37), France (40), Germany (39),  and the UK (26) combined (142). And where are the powerful Chinese global brands?

2) While the focus of the past year has been on American economic weakness, let’s not forget China has a wildly inefficient capital allocation system, a quickly aging population, and a repressive political system out  of sync with the 21st century economy it wishes to have.

3) But I think the one amazing advantage China has, in addition to all those engineers it is graduating and its lower business and investment taxes, is a sense of urgency about economic growth. That country’s leaders have to maintain a high-octane economy that will continue to pump out millions new jobs  and increase incomes every year to meet rising expectations. Here in America, the priority seems to be capping carbon emissions and universal health insurance and redistributing wealth from the top 1 or 2 or 3 ( or 4 or 5 …) percent of Americans via higher taxes. China can’t afford zero-sun thinking or policies.

Is cap-and-trade a lump of coal for Democrats?

Jul 10, 2009 16:42 UTC

The wonderful Jennifer Rubin of the Contentions blog opines thusly:

By December we will see how attractive a massive energy tax would be. (Talk about a lump of coal in your stocking.) But Boxer is smart to shove this off to the side. Democrats who cast a hard vote in the House and are now being pummeled by conservatives, business and taxpayer groups, and potential opponents (as are the Republican Eight who are in the dog house with the base). Those who supported cap-and-trade despite warnings about job losses and the adverse impact on the already struggling economy (especially in energy-producing states) are finding little support for having placed a pet issue on the liberal wish-list ahead of their constituents’ economic interests. Then the G-8 didn’t help matters either. And really, if the EPA’s own administrator says it will have no effect on climate, what’s the point of the whole exercise?

So this may turn out to be the worst of all worlds for the Democratic House leadership and the White House, who forced vulnerable members to walk the plank for nothing. Environmental groups will be furious if large Democratic majorities and a Democratic president can’t deliver. And yet those members who tried to deliver will be tagged by opponents in 2010 as disregarding bread-and-butter concerns during a recession.

My spin: And is it possible that by year end, there will be no passed and signed climate change bill, no healthcare bill (or merely a rump version) and no financial reform bill? And all Obama would have accomplished is an $800 bill stimulus bill that might well be perceived as a failure given double-digit unemployment?


James, you’re dead right on this and quite honestly the bond market knows it, which is one reason we’ve come back about 60bp from the 4 percent level on the 10 year note. The Obama agenda is dead. Let me repeat that: THE OBAMA AGENDA is dead. The best will be, as you said, some sort of half-assed rump bill. I search in vain for any other time in American history great dreams have crashed with such heart-stipping speed. Obama could still “redeem” himself, with, say, a payroll tax cut. Will he? No. It’s over.

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More U.S. stimulus? Really?

Jul 10, 2009 12:51 UTC

Morgan Stanley economists Richard Berner and David Greenlaw on whether the U.S. stimulus package should have been bigger:

Clients are asking whether the American Recovery and Reinvestment Act of 2009 was too small.  We don’t think size is the issue; rather, the problem is one of timeliness and bang for the buck.  It is heavily back-loaded and full of spending that is unlikely to be stimulative.  Moreover, some of the spending programs will be difficult to unwind, leaving structurally larger deficits and debt.  What happened to ‘timely, targeted and temporary’? The payroll tax cut of US$400 billion that we advocated last fall, if enacted in February, would likely have pushed us out of recession by now.


The problem is that Obama cynically allocated this pork spending bill toward later years in order to prepare for the 2010 and 2012 elections. If he wanted a stimulus, Obama should have started to work towards repealing the 16th Amendment.

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