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Saturday, November 10, 2012

Obama’s (dumb) Line in the Sand

 

 

 

 

So both Boehner and Obama have done their post election photo ops. They have spelled out their positions on the looming fiscal cliff. No surprises at all. The Republicans are saying “No” to any increases in tax rates while Obama has said he will outright veto any bill that is presented to him that does not raise taxes on rich folks.

 

I was surprised by the reaction in the press to the positions set forth by these two. The headlines make it seem like B&O are ready to work together, and achieve the necessary compromises to avoid falling off a cliff. I think the press has it wrong. We’re headed into a bitter fight; in part, because the President has drawn a very dangerous line in the sand.

 

 

The President has said that the recent election has shown that the majority of American’s want the rich to pay more in taxes. What is the President insisting on? Is he pushing for something that would make a difference?  I don’t think so. More importantly, the Congressional Budget Office does not agree with the President’s position.

 

The CBO put out a report on this topic last week. It spelled out the consequences of an increase in the tax rate for those making over $250,000 (versus reversing all of the Bush tax cuts). It does not add up to much.

 

 

 

The tax that Obama wants to increase will result in a lousy $42Bn in 2013 and $38Bn in 2014 according to the CBO. That’s peanuts to a government that spends $3.6T a year. The tax increase that Obama is insisting on comes to three days of spending.

 

No tax increase comes without a cost. The CBO evaluated the implications of raising the taxes on those making $250k and up. The consequences to both GDP and jobs:

 

 

 

Raising high end taxes will reduce GDP growth by .1% and will result in 200,000 less workers finding jobs. It will do these bad things by the 4th Q of 2013. Some context for these numbers:

 

The .1% drop in GDP translates to $16Bn less growth in 2013. On average, the government takes in about 20% of GDP, so the drop in GDP relating to the tax increase will translate into a shortfall in revenue of $3.2Bn.

 

The tax increase mandated by the President will translate into 200,000 less jobs for 2013. If the people who did not find work as a result were forced to stay on unemployment it would cost the government $4.6Bn.

 

So Obama’s “must have” tax increase will generate $42Bn in revenue, but it will cost ~$8Bn. The Obama’s plan is to decrease the deficit by about $34Bn in 2012, and by less than that in future years.  These numbers are beyond chump change. It comes to 0.9% of total spending and just 3.0% of the deficit. It does not move the needle at all.

 

My conclusion is that we are in for a fight. Talk of compromise and “coming together for the good of the country” is just noise. The President is insisting on a tax increase that will not achieve anything of substance. Obama has drawn a very visible line in the sand over this issue. I can’t imagine how the House Republicans will go along with it. The President’s opening position on how to work through the fiscal cliff is about politics, not economic substance.

 

Get ready for a failure in these negotiations. We are going to fall off of that cliff in 53 days!

 

 

Comments

  1. The Republicans should give Obama what he wants. Its bad policy that mostly impacts Blue State urban and suburban taxpayers (ie Obama’s core constituency.)

  2. Obama says most Americans voted for it. I guess 51% is ”most” however a far greater percentage of Americans are complete idiots wrt anything mathematical or economic.

    Also a vast majority of Americans wanted blacks to remain slaves at one time. So what’s his point?

    ”uGhh, Michelle, ugh, ugh-ughhhh, hope, ughhhhh.”

    I’m so tired of evil pig-bullies that can only think of theft as a solution to their problems. On November 11, remember that this is what our troops gave their lives to stop.

  3. Bruce,
    Mr. Obama is a smart man. He understands the math of “taxing the rich” perfectly well. It is not in his DNA to cut spending (except perhaps military spending). He also knows that trillion dollar per year deficits are unsustainable. My theory is that the can will be kicked over and over again throughout the next four years. No credible budget will be presented by either the President or the Senate. We will be governed by CRs and a series of debt limit hikes. If the crisis hits during the next four years, the President will blame it on the Republicans for not raising taxes on the rich. More importantly, he will then be “forced” to raise taxes. I suggest he will pursue a VAT or Carbon tax of some kind. Both have the potential to raise hundreds of billions per year. To me, the VAT is more likely because it is a hidden tax and when the consumer pays higher prices for goods, the President can blame it on “corporate greed”. The Carbon tax might also be attractive because it will be sold as a solution to climate change as well as a generator of revenue. Both are “jobs” bills because they will require massive bureaucracies to implement. In summary, Progressives hold all of the cards. All they have to do is sit and wait. They have no motivation to negotiate.

    I feel sorry for the saps that are unprepared for the crisis. Those who will be hurt most will be the poor and many in the middle class. I foresee long periods of zero economic growth, high unemployment, inflation and outsourcing. Mr. Obama will be unfazed. He will get what he wants – European style socialism.

  4. The top 8 of the ten most wealthiest counties in the U.S. voted Democrat. Why is the Republican party protecting this class of voters?

  5. Here is a completely different point of view from Slate a bit and link:

    “There’s no political or substantive reason for Republicans to resist a post-new-year tax cut proposal. That means there’s no leverage on the GOP side and nothing for the parties to negotiate over. Republicans took a risk with the tax sunsets, and they lost. Boehner is bluffing, and it’s time for everyone to recognize that, take the next couple of months off, and pass the Obama middle-class tax cuts in January.”

    http://www.slate.com/articles/business/moneybox/2012/11/boehner_and_the_fiscal_cliff_the_house_speaker_is_bluffing_about_the_bush.html

  6. Small.Business.Guy.1 says:

    Boehner and McConnell are no fools. No reason to fight over ACA (Obamacare), as it’s already the law of the land. Implementation is most unlikely to make it more popular. So, don’t fight stupid battles. Taxes is not a stupid issue. Fight the economic battles, and pass on the battles over social issues.

    Slate is just trying to create a mandate (and an early win) for Obama, where none exists. Boehner has laid out what he can practically get accomplished in the House prior to January 20, 2013. There’s no incentive for any lame duck representative to do anything to help out somebody who has (a) spent the last year trying to demonize them, and who is (b) now dancing around claiming victory.

    Right now, getting this ‘fiscal cliff’ dealt with requires an ability that Obama is sorely lacking in – the ability to communicate fairly and forthrightly with the different sides in this discussion. He doesn’t talk TO people (governing) – he talks AT people (getting elected). Big difference, there.

    This issue on the ‘fiscal cliff’ is likely to be decided outside of Washington, DC. It could be the markets, the EU, China, Iran, or an array of other issues. But dealing with those issues requires ‘governing’, not ‘getting elected’.

    Fiscal Cliff, here we come.

  7. The idea that a $250,000 income places a FAMILY in the “rich” category is just ludicrous. While that sum may provide a generous financial base for an individual, it qualifies only as a relatively “comfortable” category for middle class earners. While people with lesser incomes may have the advantage of a number of programs such as college tuition support for example, upper range earners carry the full burden of raising and preparing their children for a productive future. In addition, having a bit of discretionary income enables such families to support the economy in a number of important ways.

    Simply put, taxing families with $250,000 incomes means undermining “The American Dream” for those who have worked long and hard to achieve that level of success. Why would anyone keep trying so hard if they are only going to be penalized for what they have been able to accomplish by personal effort? I do acknowledge that those in the million dollar plus income category probably should be paying more in taxes…at least the numerous “loopholes” available to them should be modified. But aiming his “tax the rich” rhetoric at the $250,000 income family is ludicrous and clearly intended to garner the support of those with lower incomes who have absolutely NO idea of the financial obligations that come along with that measure of success.

  8. “in 2006, there were approximately 116,011,000 households in the United States,1.93% of all households had annual incomes exceeding $250,000.[6] 12.3% fell below the federal poverty threshold[7] and the bottom 20% earned less than $19,178.[8] The aggregate income distribution is highly concentrated towards the top, with the top 6.37% earning roughly one third of all income, and those with upper-middle incomes controlling a large, though declining, share of the total earned income.[3][9″

  9. The increased revenue charts showing what an increase of tax rate for those earning over $250k means for the budget hopefully will not be the only change in the budget. I suppose the politics being played are for mid-terms? I like the idea posed by one commenter of playing politics to head us towards a carbon tax or VAT.

    And isn’t 3% (the proposed tax rate increase) of $200k (adjusted income) only $6k. Before our retirement and now much lower taxable income, $6K annually would not have put a big crimp in our lifestyle. And I will say, that $250K income certainly doesn’t qualify one as wealthy at 36% or 39%.

  10. Small.Business.Guy.1 says:

    Both carbon tax and VAT end up functioning as regressive taxes. They end up primarily hitting consumers, as the added taxes just get incorporated into the costs of production of both goods and services. I guess either a VAT or a Carbon tax works out if your only goal is to feed the government and their special interest buddies (i.e, Uncle Warren and others like him), but for the rest of us, it’s really more like running in place on a treadmill. All you end up doing is wearing yourself out, and getting the treadmill dirty.

  11. Rich wrote: I foresee long periods of zero economic growth, high unemployment, inflation and outsourcing. Mr. Obama will be unfazed. He will get what he wants – European style socialism.

    More accurately, what we will get is Venezuelan/Hugo Chavez-style socialism.

    We will never get European-style socialism because the scandinavian counties that American socialists want to emulate are populated by the whitest white people on earth. America is 40% non-white and becoming browner by the day.

    Nope, no European-style socialism for us. Brown, South-American-style socialism is what is heading our way.

  12. I haven’t followed this, but can’t Congress simply blow off the deadline and void the compromise?

    Is the fear that a downgrade of the dollar would affect interest rates? But would the dollar really get downgraded?

    US dollar still seems a safer choice than China or Europe.