Economics of the New Administration: Tax, Spend, and Regulate
added July 2009
- July 2009
[added July 2009]
President Obama and the newly-enlarged Democratic majorities in the House and Senate took office in January in the middle of what has been described as the worst economic recession in decades – some say since the Great Depression. Not surprisingly, dealing with the struggling economy has consumed most of the time and energy of the new Administration and Congress during their few months in office.
The President took office promising a “post-partisan” Administration, with the White House and both Parties in Congress agreeing that a bi-partisan approach was needed to solve the nation’s problems. Unfortunately, the promised bi-partisanship was short-lived.
In the first meeting the President had with the Leadership of the House and Senate – just days after the Inauguration – House Republican Whip Eric Cantor (R-VA) told the President that he believed that across-the-board tax cuts would have a more positive impact on the economy than transfer payments to non-tax-payers. The President’s response to Congressman Cantor: “We have a philosophical difference. I won.” And bi-partisan relations with Congress were over.
Despite the President’s dismissal of Mr. Cantor’s tax-cut-friendly approach to the economy, business took a wait-and-see attitude toward the new President, hoping that his post-election rhetoric in fact signaled his intention to govern as a centrist and to seek consensus and an end to the partisan warfare in Washington. The hope of a centrist, consensus-building approach to governance also soon faded.
Frequently observing that he had inherited – not created – the economic recession, the President embarked on an ambitious program of unprecedented government spending, taxation and regulatory expansion, arguing that government spending on a massive scale was needed to jump-start the economy and that the automakers and financial markets demanded new regulation.
Now only five months into his term, President Obama has proposed Federal spending of almost $5 trillion and tax increases and Federal deficits of almost $2 trillion – EACH. He has also expanded the role of the Federal government in the direct management of troubled companies, announced broad new Federal authority including the creation of a new Federal credit regulatory agency, proposed a sweeping restructure of our entire health care system, and advanced an expansive and expensive new “cap and trade” program to change our environmental and energy policies. A brief summary of some of the policies that have been enacted follows.
Stimulus bill – First out of the box for the new Administration was his “stimulus” bill, the American Recovery and Reinvestment Act (ARRA). The price tag for this bill was $787 billion – after Senate Republicans insisted on reducing it a few billion dollars from its original cost. But that price tag could greatly expand. If the programs in the bill which are set to expire are, instead, extended or made permanent as the President has already said he intends, the spending in this bill would escalate to $3.7 trillion over 10 years.
On the tax side of the equation, the President originally promised that 40% of the stimulus package would be tax cuts, 60% new spending. In the end, only 26% of the bill was tax cuts, but even that is an inflated number. $112 billion of the “tax cuts” were actually “refundable” tax credits – direct payments to non-income-tax-payers. And another $70 billion was relief from the Alternative Minimum Tax (AMT), so actually a tax increase postponed rather than a tax cut. And business-friendly tax cuts? They are estimated to be a mere 3% of the tax provisions in the bill.
Fiscal Year 2010 Budget – President Obama’s Chief of Staff, Rahm Emanuel, notoriously said last fall that “you never want a serious crisis to go to waste.” Apparently acting on that advice, the President sent an extraordinary Fiscal Year 2010 Budget proposal to Congress in February, describing it as “. . .a first step in . . . . our plans to transform our economy for the 21st Century.” Further, he specifically rejected the Bush and Reagan approach to the economy – cutting taxes and restraining government spending to stimulate job creation and economic growth. Instead, the Obama budget proclaimed that “the past eight years have discredited once and for all the philosophy of trickle-down economics – in which tax breaks, income gains, and wealth creation among the wealthy will eventually work their way down to the middle class. In its place, we need economic opportunity to trickle up.”
While neither the President’s budget proposal nor the Congressional budget resolution actually changes spending or tax law, these budgets do provide a blueprint which governs the tax and spending bills to follow.
NAW sent letters to both Houses of Congress expressing our grave concern with the unprecedented explosion of Federal spending, debt and taxes.
Spending – The President’s budget called for an increase in Federal spending over five years of about $500 billion. Spending in 2009 alone is forecast to be $3.5 trillion, or about 28 percent of gross domestic product (GDP). That is higher as a share of the U.S. economy than in any year since 1945, and represents more spending than during the Viet Nam War or the recessions of 1974-75 or 1981-82. The budget predicts a deficit this year of $1.75 trillion, with huge deficits continuing for the foreseeable future. According to the Congressional Budget Office (CBO), Federal debt will reach 67 percent of GDP in 2014, and will consume a staggering 82 percent of our economy in 2019.
Taxes – The budget proposal included $1.4 trillion in net tax hikes; $1.97 trillion in overall tax provisions. Included in that proposal was a tax increase of almost a trillion dollars on individual tax payers and small businesses which file as individuals, accomplished through marginal rate increases and a limitation on itemized deductions and the personal exemption. The President’s budget also recommended $353 billion in direct tax increases on business, and $646 billion in additional revenue to be generated through a new “cap and trade” policy. The budget also proposed $3.25 trillion in individual tax cuts primarily for lower-and middle-income wage earners.
Congressional action – Congress quickly passed the President’s stimulus bill, and passed a Congressional Budget Resolution which closely (but not entirely) followed the President’s recommendations. It is worth noting, however, that no House Republican and only three Republican Senators supported the stimulus bill – and one of those three Senators was now-Democratic Senator Arlen Specter (D-PA). Not a single Republican in either Chamber voted for the Budget Resolution. After promising a bi-partisan government, President Obama accomplished something no Republican Leader had done in years – he unified the usually divided Republican Conferences.
Current state of play – Polls increasingly reveal a growing public worry about and declining public support for the massive increases in Federal spending and deficits proposed by the President. The economy now tops the issue rating charts as job losses grow and the economic recession drags on.
While the President maintains high personal approval ratings, and Republicans struggle to increase theirs, the political dynamic shows signs of change.
Recent polls show a sharp drop in the President’s job approval – as opposed to his personal approval– ratings. Concern continues to mount about the spending and deficits, and there is solid opposition to further government industry bailouts. For the first time in years some polls are showing that voters have more confidence in Republicans than Democrats on handling of the economy.
More significant, while the President continues to blame President Bush for our economic woes, an increasing number of Americans now believe that the President “owns” this economy as a matter of public policy. It is normal for a new Administration to eventually be held responsible for the nation’s economy, but some pundits see this responsibility shifting from Bush to Obama more quickly than they had anticipated.
It remains to be seen whether the massive spending and piling up of Federal debt become a political liability for the President, whether the GOP as the “loyal opposition” can garner popular approval by opposing the President and offering “small government” alternatives, and whether the President’s proposals to re-make our health care system and impose a cap and trade policy will hit additional bumps in the road if voter concern about these big-government policies grows.