James Pethokoukis

As you are contemplating the idea of a (perhaps ) $300 billion surtax on wealthier Americans to help pay for healthcare reform, consider that ALREADY the potential growth rate of the US economy has been lowered by all the government intervention in the economy. In a recent research note, economist David Rosenberg said he was worried about the price-earnings ratio of the stock markets:

As an aside, with the U.S. government now putting its fingers into more than one-third of the economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple in the future will be lower than it has been — given the implications for productivity and the potential non-inflationary growth potential.

Recall that already the top income rate is being raised to 40 percent … and higher investment taxes … and a possible cap-and-trade energy tax … and a possible Social Security tax hike. In addition, more of tax burden is being placed on a smaller segment of the population — nearly half of Americans pay no taxes. This is exactly one of the big problems California faces. In the end, Democrats are pusing for a costly healthcare reform measure at a time of huge deficits and tax increases during a terrible recession. Wrong formula, wrong model.

Pimco bond guru — and occasional White House economic adviser –  Bill Gross paints a really depressing economic future

The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007.  … And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%.  … As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model. …

If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.

This, from the president of France: “I will not increase taxes,” he said, “because an increase in taxes would delay the end of the crisis and because by increasing taxes, when we are at our level of taxation, we would not reduce deficits — we would increase them.”

Francis Cianfrocca has an interesting post over at Contentions called “Our High-Tax, Low-Growth Future.” Like me, he also saw Ben Bernanke’s testimony yesterday as a harbinger of tax hikes to come:

Since we must scale back fiscal borrowing as we move into the future, there are only two alternatives: to accept far higher levels of taxation, or to accept a U.S. economy that is significantly smaller and slower-growing than it would otherwise have been. (The consequences of the latter, of course,are high unemployment and less material well-being for individuals.)

What would be a logical way to navigate between those alternatives? Adopt a high-tax policy that does as little as possible to burden highly-productive individuals, businesses and capital, thus lessening the impact on the size and dynamism of the economy.

But we already know that the President wants to do exactly the opposite. Faced with an evil choice between much higher taxes and a smaller economy, Obama is on track to give us both.