Monday, July 11, 2011

Obama and Taxes

It seems that President Obama has decided that he can't have any deal on the debt limit unless he can raise taxes. That is why Boehner has walked away from the talks. There was a possible deal along the lines of what, as James Pethokoukis outlines, Obama's own debt commission recommended to lower tax rates along with a reform of the tax code to get rid of special tax deductions or as he likes to call them - tax loopholes.

Let us not forget that Obama has already passed the largest tax increase since 1993 in Obamacare. The WSJ reminds us of all the taxes that are part of that bill. Here are a few examples of how Obama has already signed tax increases into law.
• Starting in 2013, the bill adds an additional 0.9% to the 2.9% Medicare tax for singles who earn more than $200,000 and couples making more than $250,000.

• For first time, the bill also applies Medicare's 2.9% payroll tax rate to investment income, including dividends, interest income and capital gains. Added to the 0.9% payroll surcharge, that means a 3.8-percentage point tax hike on "the rich." Oh, and these new taxes aren't indexed for inflation, so many middle-class families will soon be considered rich and pay the surcharge as their incomes rise past $250,000 due to tax-bracket creep. Remember how the Alternative Minimum Tax was supposed to apply only to a handful of millionaires?

Taxpayer cost over 10 years: $210 billion.

• Also starting in 2013 is a 2.3% excise tax on medical device manufacturers and importers. That's estimated to raise $20 billion.

• Already underway this year is the new annual fee on "branded" drug makers and importers, which will raise $27 billion.
And there are more adding up to $438 billion in new revenue in the next 10 years and much more after that.

And let us not forget planned increases on the payroll tax that are supposed to kick in in 2013. Obama says he wants to reduce that payroll tax 2% now, and neglects to mention that it is supposed to increase two years from now. As the WSJ says: "So if a payroll tax cut creates jobs this year, why doesn't a payroll tax increase destroy jobs after 2013?" It's because none of Obama's plans are about creating jobs. He's all about growing the size of government. That is exactly what he has done since he took office. And he's succeeded. Government is bigger and will grow even more when Obamacare fully kicks in. He's frontloaded government growth and now needs to raise taxes to keep what he has already instituted in place.

But none of this has anything to do with creating jobs. A new survey of small businesses continues the bleak news.
The U.S. labor market could stay sluggish for a while, with small-business executives reluctant to hire amid the murky economic outlook.

Almost two-thirds—64%—of small-business executives surveyed said they weren't expecting to add to their payrolls in the next year and another 12% planned to cut jobs, according to a U.S. Chamber of Commerce report to be released Monday. Just 19% said they would expand their work forces....

More than half of the small-business executives in the June 27-30 survey cited economic uncertainty as the main reason for holding back on hiring. About a third blamed lack of sales, while just 7% pointed to problems getting credit.
Since nothing that Obama proposes will decrease employer uncertainty, don't look for those small businesses to pick up hiring any time soon. And remember, the increases that Obama and the Democrats would like to make on top earners will affect many of those same small business owners. No wonder they're too concerned about an uncertain business climate to want to increase hiring. Conn Carroll outlines the scope of the problem.
Government stimulus spending is ill-suited to this task. Rather than help entrepreneurs create jobs, it actually makes the process harder by keeping unsustainable business models on life support with a dose of cash. Take as examples Obama's cash-for-clunkers program, and the first-time homebuyer subsidy. Both policies temporarily and artificially boosted demand in a given sector of the economy. Neither policy helped those employed in the affected economic sectors find sustainable jobs after the government spending ran out.

Can government simply keep subsidizing inefficient and failing areas of the economy forever? Keynes seemed to think so. Pressed to justify the long-term borrowing costs of his short-term stimulus policies Keynes famously once said, "In the long run, we're all dead." Unfortunately for the United States, the long run is now here in the form of a $14.3 trillion debt. And there is evidence that the size of the current debt is making it harder for entrepreneurs to create jobs.

A study released earlier this year by Stanford economist John Taylor found a strong relationship between private sector investment and employment: The higher private investment is as a share of total economic activity, the lower the unemployment rate. But, more than 20 months into the Obama recovery, private sector investment has not returned to pre-recession levels. And the federal government's uncertain fiscal future is a big reason why.

How much will taxes rise in the upcoming debt limit deal? $500 billion? $1 trillion? And even after that tax increase is done, will the 2001 and 2003 tax cuts be extended in 2012? Letting the current rates expire would increase taxes by $5 trillion. How can businesses be expected to make long-term investment decisions when they don't even know what their tax liabilities will be?

Governments don't create sustainable jobs. Entrepreneurs do. Obama would do well to get out of their way.
But Obama doesn't believe in government getting out of the way of entrepreneurs. And so, as long as his policies continue, steep unemployment will continue.

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