The Tax Deal Will Only Stop GDP From Going Down

President Barack Obama caved to the Republicans, and specifically to the Tea Party on extension of current economic policy.  He didn’t have a choice.  Elections have consequences, and in his 2008 words, “I won.”  In this case the Tea Party won. 

One thing to remember is this really throws a wrench into White House budgeting plans.  They surely included a tax hike in their budget projections.  Going further, no doubt they used simple accounting to estimate revenue.  If there was a tax of 35% and they recognised $X billion of revenue in the WH budget, they simply re-estimated revenue would increase 4.5% of $X Billion when the new rate went to 39.5%. 

Surely though, revenues would have been down at the higher rate.  So in effect, the Obama administration will actually get higher tax revenue than they otherwise would have.  A back door break for them.

It’s also proper to note that there are no tax breaks in this deal.  It’s simply an extension of current tax rates. There is a 2% decrease on Social Security taxes for one year.  But, that is not the same as reducing marginal tax rates.

Here are the particulars of the deal.

The existing tax policy (also called the Bush tax cuts) are extended for 2 years.

Obama is setting up an election issue here for sure.  He thinks his rhetoric and the left wing media will help him win the day.  The class warfare card will be on display for the next two years as this plays out.  Obama will highlight how rich the rich are becoming, along with pointing out the misery of the unemployed.  Extending current tax policy will help with certainty and will help the economy over the next couple of years.  The opportunity cost of raising taxes would have been far higher.  There is surely a difference between liberals (progressives, socialists) and conservatives on taxes.  No doubt the Tea Party, which has captured the minds and hearts of the independent voters, come down on the side of tax cuts.  Obama will lose this debate in two years.

Social Security taxes go down by 2%, for 1 year.

This is a band aid.  It increases the amount of debt without Social Security entitlement reform.  Entitlements are the third rail of American politics.  They need to be reformed.  Of course, that wasn’t going to happen in any lame duck Congress.  However, the country will go broke with the amount of entitlements, government pensions that we owe.  This measure won’t decrease unemployment, but it will put 2% more money in people’s pockets, so consumer spending should not get killed.  Again, this was an economic opportunity cost decision.

Estate tax goes to 35% for estates over 5 Million Dollars.

This measure allowed the Democrats to save some face.  They had to show that they were punishing the rich in some way.  By the way, wealthy Democrats will not get taxed by this.  They pay trust lawyers for that. So do wealthy Republicans.  The estate tax doesn’t hurt people like Warren Buffett that has generational wealth.  It does hurt people that pulled themselves up by their bootstraps and did OK in life, or the small businessman that wants to pass a business down to their children.  Farmers that want to pass a farming operation on to the next generation are also severly penalised by estate taxes. For the record, it’s sometimes the third or fourth time the money is taxed.  Taxed on earning it, on dividends, on buying it (transfer and sales taxes), and they also want to tax you when you die.  You are truly wealthy when you are rich enough to be a Democrat.

Extension of unemployment benefits for 13 months.

If Obama loses the debate on taxing the rich, he can play the class warfare card again in 13 months.  In addition, the Republicans couldn’t look like Ebenezer Scrooge ahead of Christmas. The next time this comes up for a vote will be January 2012.  Election season will be in full swing.  The reasoning President Obama gave for extending unemployment benefits was economically ludicrous.  Obama said that the government sending checks to unemployed people will stimulate spending, which will increase demand creating employment.  If that logic is correct, why don’t we just load up a bunch of helicopters and drop bucket loads of cash from them?  It sort of sounds like “trickle up economics”.

The real news is government transfer payments do little to impact or stimulate an economy.  The money for the benefit has to be borrowed.  It’s a 1:1 transfer.  If Obama wanted to impact employment, he would cut the corporate tax rate, cap gains rate, and make it easier for expats to work overseas without paying double taxes.

Meanwhile, for every percentage drop in tax rates, there is a corresponding three per cent increase in GDP. This plan won’t necessarily increase GDP since rates aren’t dropping.  But, it won’t go down because of increased taxes.

That’s about it. Oh, and Nancy Pelosi and evicted from power House Democrats are stamping their feet.  Temper tantrums are not becoming when you are scoping out the Help Wanted ads preparing for the move back home.

The left will start to play the “shared sacrifice” card and the class warfare card.  But, everyone knows that government is not efficient at spending money.  Spending, i.e. Keynesian economics, also cannot solve the social problems or economic problems of the country.  Billions have been spent in communities like the south side of Chicago where Obama was a community organiser and it has gone for nought.

Obama is correct, there is a huge disconnect between the political parties.  When the Tea Party is tossed in with the Republicans, the gulf is an unmendable chasm.  The Tea Party understands economic incentives.  They cognitively accept that government can be too big, and know the consequences of the tyranny of a large government. 

Many wonder what the social issues of the Tea Party are.  Immediately people think about the two most divisive issues on tap today, Abortion and Gay Marriage. Tea Partiers really don’t contemplate them hard.  I’d say if you polled the Tea Party, the percentages of for and against would replicate the broader population.

But columnist Jennifer Rubin correctly pointed out, that the Tea Party does indeed have some social issue concerns.  They are personal responsibility, delayed gratification, saving, thrift, work, education, and along with that personal independence.  Sounds just like the ideals of Ben Franklin and the rest of the Founding Fathers.

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