June 29, 2008

Obama’s Taxes: The $2 Trillion ’1970s Show’ Mirage

Filed under: Economy,Soc. Sec. & Retirement,Taxes & Government — Tom @ 2:52 pm

Note: This post originally appeared on Friday at Pajamas Media under the title “Obama’s Taxes: A $2 Trillion Trip Back to the 1970s.”

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Remember how the press made George Bush’s tax-rate cuts look so “huge” in 2001 and 2003?

A March 10, 2001 New York Times article by reporters Frank Bruni and Richard W. Stevenson typified the approach. The trick was to talk about the (scary) $1.6 trillion impact of the “cuts” while minimizing attention to their time frame. At the linked article, the reporters waited until the ninth paragraph to tell us that it was a “$1.6 trillion, 10-year package” — that is, a less-intimidating average reduction of $160 billion a year.

Using consistent language, Barack Obama’s tax proposals involve tax hikes of at least $2 trillion, and possibly $3 trillion, over the next 10 years.

Obama would bring tax policy back to the 1970s, or about where we were before the Reagan-era tax-rate cuts that triggered The Seven Fat Years of 1983-1989. Despite being partially offset by Bush 41′s and Bill Clinton’s rate hikes, the Reagan rate cuts and their remnants propelled the economy forward almost non-stop for almost 18 years until the 2000 bubble-burst.

Using “static analyis,” the non-business press and rate-cut opponents assumed that Reagan would deprive the government of huge sums of money. Supply-side rate-cut proponents knew better, and predicted that more money, not less, would flow into the federal treasury, as the unleashed economy would grow faster than if rates were not changed.

That supply-siders’ predictions were correct is indisputable. Congressional Budget Office data show that federal fiscal-year receipts increased by 65% from 1983 to 1989 — a compound annual rate of 8.7%.

The Bush rate-cut success story is similar. While the rate reductions on earned income were less substantial than many would have liked, bringing the top rate down only to 35% from Clinton’s 39.6%, the 2003 Bush capital-gains and dividend rate cuts were more aggressive than their Reagan-era counterparts.

Those investment-related rate cuts have favorably influenced behavior far beyond even proponents’ wildest dreams. Federal fiscal-year receipts increased by 44% from 2003 to 2007 — a compound annual rate of 9.6%. Even in fiscal 2008, as the media and Alan Greenspan obsess over a possible recession, federal receipts before economic stimulus payments are on track to increase by about 4%. April 2008 receipts set an alltime single-month record.

If a President Barack Obama gets his desired tax increases, he will show us that supply-side economics has a painful reverse gear. Just as Uncle Sam never had to do without the $1.6 trillion the New York Times and the rest of the media fretted over in 2001, an Obama administration will never see anywhere near the multitrillion-dollar tax-increase windfall it hopes for.

Let’s look at the static Obama numbers. I started with the most recent available IRS tax-return data from 2005 (specifically Table 1.4, a download accessible at this IRS link). Adjusting for estimated inflation since then, and (naively) assuming no change in behavior, here are my first-year lowball estimates of the impacts of the major proposed tax hikes:

  • Obama has said he will let the Bush tax-rate cuts expire for incomes over $250,000. This will push those taxpayers into either the 36% bracket (up from 33%) or the the 39.6% bracket (up from 35%). Estimated annual impact, before considering the investment-related items that follow: at least $110 billion.
  • Although waffling a bit, it appears that Obama plans to increase the capital gains rate nearly to its pre-2003 level, and to once again make dividends fully taxable as ordinary income — again, apparently, on incomes of over $250,000. Estimated annual impact: at least $50 billion.
  • Third, as discussed in last week’s column, Obama plans to impose the Social Security payroll tax on all income from work and self-employment above $250,000. Estimated impact: at least $40 billion.

That’s at least $200 billion a year in tax hikes; if 2007 IRS data were available, we might find that the static impact is really closer to $300 billion. Consistent with media treatment earlier this decade, we’re talking about “at least $2 trillion (over the next 10 years).”

But Uncle Barack will never see most of that revenue, because taxpayers will make adjustments. Among them: CEOs will restructure their pay packages; entrepreneurs will work less hard, and pay themselves lower salaries; investors will move funds between investments less often, and push for smaller dividend payouts. In the Wall Street Journal last week, Lawrence Lindsey estimated that the Social Security payroll tax hike alone will “make the private sector $5 poorer …. (and only) make the government $1 richer.”

Barack Obama, in bringing back the tax structure of the 1970s, would cause many of the highest-earning taxpayers with income from work or self-employment to face a top marginal rate of 60% or more: 39.6% federal, 12.4% Social Security, 2.9% Medicare, and often 5% or higher state and local income taxes.

This is one 1970s show that we don’t need to see. Economic stagnation in the name of class warfare doesn’t play well, even in re-runs.

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22 Comments

  1. Let’s not forget the raid on the private pension system that is planned which involves a number of clever schemes designed to grant the U.S. Treasury a one time windfall of up to $1.5 trillion. That is $1,500,000,000,000.00 for immediate give away programs.

    Let’s not forget that President Bill Clinton came close to pulling it off. The Republican take-over of the Senate and House put a halt to Clinton’s ideas. But, he pushed on.

    First, Clinton proposed the idea of ECONOMICALLY TARGETED INVESTMENTS. This would require each and every pension fund in the United States (of which there are thousands) to invest up to 10% of its portfolio into government programs.
    Ohio has several separate state pension funds, Cincinnati maintains a pension fund of about $2.3 billion. The total amound held in all pension funds is approximately $8 trillion.

    Secretary of Labor Robert Reich was sent out and about to promote this idea. I recall an interview with him on MCconnell, and that fast talking weazel just wouldn’t listen.
    Reich testified before congeress on 6-22-94 on this subject:

    http://www.dol.gov/oasam/programs/history/reich/congress/062294rr.htm

    He concluded his testimony with the following:

    I encourage plans to consider such investments when they make their investment decisions. America’s pension funds — $4.6 trillion and still growing — are the stewards of our economic future.

    STEWARDS OF OUR ECONOMIC FUTURE? ? ? ? ? ? ? ? ? ? ? ? ?

    What he really meant was that I will take from YOUR nest egg and give it to somebody else.

    Secondly, Clinton floated the idea of a one time 15% tax on the value of ALL pension plans (those above) and your 401k, IRA. He also wanted to tax gains made within your pension accounts on a yearly basis AND a tax on employer contributions.

    These two ideas have been sitting on the back shelf since the mid 1990s – and Obama has been known to be dusting them ooff and bringing them back.

    SOURCES:
    CLINTON PENSION GRAB – GOOGLE

    ECONOMICALLY TARGETED INVESTMENTS – CLINTON REICH/ GOOGLE

    IMPUTED INCOME

    PENSION TAX ALICIA MUNNELL – GOOGLE

    Comment by Timothy — June 29, 2008 @ 5:02 pm

  2. #1, the pirates of old were at least more honest about their looting and plundering. This “targeted investment” garbage is doublespeak for “government programs funded by pension funds, with no reasonable chance of a meaningful long-term return.”

    Comment by TBlumer — June 29, 2008 @ 5:28 pm

  3. Another tactic in the ongoing economic terrorism by the Left to bring down the U.S.

    Comment by Joe C. — June 29, 2008 @ 5:37 pm

  4. Losing 60% of a check should be enough to scare anyone into not voting Obama.

    Comment by Ben Keeler — June 30, 2008 @ 2:34 am

  5. #3 and #4, this, like other aspects of what Obama wants to do, is getting relatively little coverage.

    Comment by TBlumer — June 30, 2008 @ 7:43 am

  6. But the problem is will the MSM report it? I think not. You notice how the MSM is failing to report the subtance of any of Obama’s proposals? It’s all sales talk designed to sell the public on the idea but keep everyone in the dark as to what it really entails. What would a $1.5 trillion dollar hit on the nations pension funds do? Given they invest all their money in the market via bonds, mutual funds and T-bills, this would represent a withdrawl of $1.5 trillion from the market of investment dollars. The effect of such a withdrawl would be catastrophic, since investment capital is the engine supporting any economic expansion. It is a zero sum game with nasty consequences.

    Unlike the lucky timing of Clinton’s tax increase we don’t have a period of stable energy prices to allow the economy time to simply lop off percentages of GDP and then adjust to the new reality of costs against the bottom line. Taxes are costs against the bottom line, so something has to give.

    Comment by dscott — June 30, 2008 @ 11:49 am

  7. And then there is Obama’s plan to tax what is known as IMPUTED INCOME.

    Simply put – this means that if you pay off your home mortgage the I.R.S. will assign a rental value to your home, and addit to your income.
    Your home is determined to have a rental value f $1500 month, thus your taxable income is now $18,000 higher.

    http://www.papillonsartpalace.com/imputed.htm

    http://www.smallerindiana.com/group/republicangroup/forum/topic/show?id=1736855%3ATopic%3A70556

    CLINTON WANTED IT. OBAMA WILL GET IT.

    Comment by Timothy — June 30, 2008 @ 1:04 pm

  8. All this is good stuff Tom, is there any chance at all that maybe someone from FNC would be interviewing Obamatron to pop the questions if he is considering them???

    Comment by dscott — June 30, 2008 @ 3:54 pm

  9. #8, probbaly not

    Comment by Ben Keeler — June 30, 2008 @ 5:05 pm

  10. #8, I’ll guess that FNC won’t be seeing Obama until December. That shouldn’t stop Campaign Carl or whoever from popping the Qs at a press conference. But I read somewhere that Team Obama is cutting back on his appearances and access.

    IIRC, Obama himself blamed Fox news for the Wright controversy.

    Comment by TBlumer — June 30, 2008 @ 5:08 pm

  11. #7, I set up a Google Alert for “imputed income.” Will see what materializes in the coming months.

    Comment by TBlumer — June 30, 2008 @ 5:12 pm

  12. Just wait. Remember when Clinton ran in ’92, he campaigned on the promise of a middle class tax cut. None of the information about the ETI’s or a tax on the pension system(401k-IRA) was mentioned. I think when Mike McConnell interviewed Secty of Labor Reich, he asked why Clinton was going for more revenue through the Economically Targeted Investments when he just got one of the largest tax increases in U.S. history. Reich, of course, avoided a direct answer, did refer to “putting people first.”

    Think I did hear something mentioned after Fr. Michael Pfleger’s outrageous sermon at Obama’s church.

    Here is the text of that speech:

    http://www.freerepublic.com/focus/f-news/2023239/posts

    One line from the speech: Throw away your 401 fund! [sic] Throw away your trust fund! Throw away all the money that been put away in the company you walked into ’cause your daddy and your granddaddy and your great grandaddy —

    I do look for this to resurface. The Wall Street Journal frowned on Clinton’s attempt to raid the pension system as I recall.

    Comment by Timothy — June 30, 2008 @ 5:16 pm

  13. #12, I too expect a post-electioni resurface.

    The “problem” is that ERISA demands that you put plan participants first. ERISA law would have to be rewritten to allow for investments that don’t pass normal due diligence — not that they wouldn’t do the rewrite in a rubber-stamp situation, but that is a barrier.

    I heard Pfleger’s sermon on that item, and didn’t make the connection, but it’s a valid interpretation of the “white guilt for white supremacy” meme.

    Comment by TBlumer — June 30, 2008 @ 6:25 pm

  14. TBlumer wrote……The “problem” is that ERISA demands that you put plan participants first. ERISA law would have to be rewritten to allow for investments that don’t pass normal due diligence — not that they wouldn’t do the rewrite in a rubber-stamp situation, but that is a barrier.

    In his testimoney Secty of Labor addressed this…
    http://www.dol.gov/oasam/programs/history/reich/congress/062294rr.htm
    ……..Reich Said…….Properly constructed, ETIs are appropriate investments under the fiduciary standards of ERISA. As you all know, there has been some confusion in the pension community on that point. But today’s Interpretive Bulletin should erase any doubt. Pension fund investments that produce a competitive risk-adjusted rate of return for plan participants and that produce collateral benefits to workers and communities are unquestionably permissible under ERISA law. I encourage plans to consider such investments when they make their investment decisions. America’s pension funds — $4.6 trillion and still growing — are the stewards of our economic future.

    Comment by Timothy — June 30, 2008 @ 7:05 pm

  15. #14, unfortunately, Congress would pass it with Reich’s assumptions, and it would have to be litigated, allowing many years of damage in the meantime.

    Comment by TBlumer — July 1, 2008 @ 3:09 am

  16. #14, so basically what the Dems want to do is exactly what they did with the SS trust fund, steal the money claim they are investing it and in the process screw the pensioners.
    At what point does stealing from old people become a slimy underhanded thing to do by low lifes? I guess it’s only when a con artist swindles money from old people “outside” of the government via private enterprise does it become a crime.

    Comment by dscott — July 1, 2008 @ 9:48 am

  17. #16, I think you know this, but to be clear, #14 doesn’t support the idea.

    Comment by TBlumer — July 1, 2008 @ 10:03 am

  18. TBlumer wrote – - -unfortunately, Congress would pass it with Reich’s assumptions, and it would have to be litigated, allowing many years of damage in the meantime.

    And you are correct TB.

    My bone of contention is that there are people who think that weasel Reich does.

    Here is a clip from the speech of Jesse Jackson at the 1996 Democratic Convention:
    - —
    America has $6 trillion in private and public pension funds. We could take 5 percent of the workers’ money, with workers’ consent, government secured, to rebuild our infrastructure.

    http://www.inmotionmagazine.com/jjdem.html

    The Wall Street Journal wasn’t very happy with that remark. It did not go unnoticed.

    Notice Jackson says “take 5%” and “with workers consent.” Sure, one worker says “no” so his pension isn’t affected. You know it does not work that way.

    Another concern is that the WINDOW OF OPPORTUNITY will be had for President Obama from 1-20-09 until 1-1-2011 when the new Republican congress takes over. Obama may have a substantial majority for the first two years of his term.

    Clinton did not have a large majority in the house and senate, and he was unable to push through the hillary health care.

    We can thank Newt Gingrich and his work for preventing much of this leglislation that Clinton pushed for in his first two yeas as President.

    Comment by Timothy — July 1, 2008 @ 10:24 am

  19. #18 — Great points.

    Boehner is good, but he can’t do miracles in a rubber-stamp situation. I think that’s solvable this election, but it going to take some persistent brass ones to do what I would suggest, which is coming..

    Comment by TBlumer — July 1, 2008 @ 12:47 pm

  20. The hit on private pension funds will destroy the market and in effect confiscate everything the working/producing people in this country have. These people are nuts if they think I will sit by and watch what I have worked hard and saved for over the last 30+ years confiscated by them and handed over to their do nothing supporters. People, it’s about time for another tea party only this time instead of tea they should be thrown in the drink. If this government thinks the riots of the 60’s were bad you haven’t seen anything yet! This is why they fear the second amendment so much. They know it was put in the Constitution as a last resort safety to enable the people the means to overthrow a repressive government. Wholesale confiscation of private property is as repressive as it gets. This is the first thing the Communist did in every country when they took over.

    Comment by Marvin Mattingly — July 1, 2008 @ 1:41 pm

  21. #17, yeap I understood he wasn’t supporting it.

    At some point everyone needs to wake up and realize there is no excuse for stealing from granny’s retirement fund just to pay off someone else. It’s not an investment, it’s called theft.

    Comment by dscott — July 1, 2008 @ 3:34 pm

  22. from dsott…there is no excuse for stealing from granny’s retirement fund just to pay off someone else. It’s not an investment, it’s called theft.

    Uh, think President Clinton refered to it as “people helping people”….

    And, of courch Secretary of Labor refered to the $4.9 trillion in penson funds (in 1996) as being the “stewardship of our economic future”……

    Hear tell of a story and I can’t find the link. It goes like this:

    Woman in her 60s in Venezuela was called in by the tax office and asked why she had so much money in her bank account. She replied that she had been saving for retirement for over 40 years.

    The government offical informed her that the government will provide for her in her retirement as they determine necessary, in the meantime, her funds now belong to the government.

    Who knows, Obama could take ALL PENSION MONIES,401ks, etc. and distribite them equally among all.

    Comment by Timothy — July 1, 2008 @ 4:34 pm

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