Would Obama's tax hikes sink economy?

With the national fiscal situation in tatters, President Obama pushes for long-term budget austerity, including a 'Buffett tax' on the rich.

By Anthony Mirhaydari Sep 19, 2011 12:58PM

President Barack Obama has sure been busy lately. Two weeks ago he unveiled his American Jobs Act in front of a joint session of Congress -- a $450 billion stimulus plan composed mainly of tax cuts along with spending on infrastructure and unemployment benefits. The idea is that it would boost the economy in the near term and stave off the risk of another recession driven by premature budget tightening.

 

But that doesn't remove the need for a long-term plan on cutting the deficit and reducing the national debt -- the lack of which was responsible for America losing its AAA credit rating last month. It's a delicate balance: The government needs to listen to the bond market and borrow now at ultra-low interest rates to support the economy before pulling the plug later as the recovery becomes self-sustaining.

 

Monday, Obama unveiled his plans for the second half of this strategy --a $4 trillion cut to the budget over 10 years featuring, most prominently, a $1.5 trillion increase in taxes on the wealthiest Americans to ensure they don't pay lower tax rates than the middle class.


But would the so-called "Buffett tax" -- proposed by Berkshire Hathaway (BRK.A) CEO Warren Buffett and pushed by Obama -- sink the economy by soaking the rich?

 

The short answer, assuming the American Jobs Act gets passed in some form, is probably not.

 

First, the tax increases wouldn't kick in until 2013, when the Bush tax cuts for people making more than $250,000 a year expire. It would also limit deductions for high-income households by preventing them from taking things like mortgage interest deductions. Tax breaks would also end for oil companies, corporate jet owners and hedge fund managers.

 

Second, tax hikes have a much smaller impact on the economy than spending cuts do. Using the so-called fiscal multiplier, analysts at Moody's estimate that each dollar raised as part of ending the Bush tax cuts would result in only a 30-cent drop in economic activity.

 

Compare this with the impact of items contained in Obama's jobs plan. Each dollar of extended unemployment benefits and infrastructure spending adds $1.60 to the economy, while a payroll tax holiday adds $1.25.

 

And finally, as the pressure from globalization has pushed down the average worker's wages over the past few decades, it has increased the returns available to holders of capital -- i.e., the rich. The result has been a marked increase in the gap between the ultra-rich and everyone else.

 

This wasn't sustainable during the Gilded Age in the late 1800s and it isn't sustainable now. A large gap, like the current one, stretches the fabric of society. Back then, it resulted in an ugly breed of populism that resulted in violent labor strikes, monetary devaluations, and trade protectionism. 

 

We're already seeing signs of this again now: Witness the Arab spring, riots in London, sit-ins in Madrid, warnings of a new currency war, China's hoarding of rare-earth metals, deadly protests in Athens and massive street marches in Tel Aviv. Working to reduce income inequality by taking small steps now is the right thing to do to avoid the risk of large-scale protests and social unrest.

 

Remember that with the budget deficit expected hit $1.3 trillion this year and with the national debt approaching $15 trillion, something needs to be done. Mainly, it's about out-of-control health care costs and an underfunded Social Security program. But the national deficit is about more than just how much money we owe to creditors. It's about our underinvestment in our roads and our children. It's about how we lag behind the rest of the world in math, science and high-speed Internet access.

 

All these things will cost money. The low-hanging fruit is easy: Obama plans to cut agriculture subsidies, end the wars in Iraq and Afghanistan, cut funding to Fannie Mae and Freddie Mac, and add a $100 fee on private jet flights.

 

Where will the rest come from? At this point, the least bad option is to take the money from places that will do the least damage to overall growth. And that means the rich will need to get a little wet. Otherwise, we'll need to start turning seniors away from hospitals or tell the Chinese we're not paying our bills. There is no other way.

 


Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


 

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98Comments
Sep 19, 2011 2:15PM
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Let's just elect AMERICANS to congress and get rid of democrats and republican.Stop worring about your party and start thinking about your COUNTRY.Donot relect anyone let's start out fresh
Sep 19, 2011 3:41PM
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In order to get this country on the right track we need to completely clean out the idiots in Washington & put everyday people in these positions who possess a brain & common sense(which there are plenty of in this country).  These idiots in Washington bought their government seats because most of them came from wealthy/super rich families.  We the people really do not have a choice because these buffoons use their riches to get elected.  Yes we voted for them but when you look at the choices presented to us not one of them is an everyday worker who reports to a job & supports a family & house on a modest wage.  These elected officials are so out of touch with the everyday person because everything has been handed to them on a platter or by the maid!!!

Sep 19, 2011 2:01PM
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I was just reading the US history on tariffs on Wikipedia.  It seems that from the birth of t his nation tariffs were used to fund the general operation of the country as well as to fund wars, etc.  Then along came the personal income tax.  At this country's beginning, tariffs were at about 15% and now they account for 1.3% or something like that.  I say stop all this fighting about income taxes and fund this government by using tariffs once again.  We as people need to stop our divisiveness and stick together.
Sep 19, 2011 2:00PM
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Globalization? No other country on Earth has sent it's entire manufacturing base lock, stock, and barrel to other countries as the U.S. has while leaving an empty chair, an empty desk, and a blank computer screen as the only remnants of what once was a viable home based company. They call this the headquarters. In 1999 China did not have anything to trade back and forth with the U.S., so we created their exports for them with our factories and jobs. If you want to call that Globalization, fine, go ahead. I call it a U.S. manufactured Globalization at the nations own expense. Create a foreign market, while destroying your home is what it really is. The U.S. and it's corporate world is so involved in nation building all over the place, that it has forgotten about it's own nation, America. We lay in ruin.

And as for turning seniors away from health care, well it's coming very soon. Anyone for a nice little lethal injection. No abortions either, but if you can't afford to give birth it's a lethal injection for the woman and the baby also. This will fix things. 

Sep 19, 2011 2:31PM
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Obama cannot create any new jobs that pay enough money that will support the current prices to sustain any long term economic growth. That is up to the private companies to do and they have no incentives to do that. They can get cheaper labor from the pool of Offshore Labor Camps like India and China. The USA's Corporations have EXPORTED their jobs and processes to other countries for less money and less environmental regulations. Friends, you will see this economy continue to head south as in the Dow Jones back down to the 6000 level, home prices will drop 35% from where they are today (09/19/11) and the number of people living out of RV's increase. How many products does America produce anymore? Lot's of Pharmaceutical Drugs but that is about it. We do not EXPORT any goods but we do  EXPORT good paying jobs in exchange for lower costing employees.
Sep 19, 2011 1:57PM
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It's a bunch of "mumbo jumbo" and at the end of the day I have no extra money in my pocket...actually I have less.

Sep 19, 2011 1:48PM
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Yes, because that is the only recourse left.  Unfortunately, since it is not a total re-write of the whole tax code that eliminates some Government Jobs and also nothing is being done about Tort Reform,  it will not help but only drive the economy further down.  The problem is GDP not more money for Government to waste.
Sep 19, 2011 5:25PM
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I think the fair tax is the way to go.
Sep 19, 2011 2:15PM
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I for one think the president will be just one term.  He hasn't done anything for us.  Now I'm sorry I voted for the guy.
Sep 19, 2011 3:37PM
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PlanoDude,

 

Only Democrats believe that UNEQUAL is fair...   They believe some are MORE equal than others and thus should pay no taxes. 

 

You cannot have equality in anything without economic equality in taxation.  Sorry the Percentage should be the EXACT same for everyone.  The tax coide should be 1 page long, not 57,000 pages of Democrat exceptions and inequality rules...

 

If 20% is too much a burdern of the lower incomes, then GOVERNMENT SPENDING should be REDUCED to a more reasonable level.  Everyone SHOULD FEEL the pain of government.  We have a system whereby 49% pay Zero, and the highly productive people have to pay for the leeches that can't or won't pull their own weight.

 

In other words the PEOPLE PAYING are tired of hearing the complaints from the PEOPLE COLLECTING that they want more...

 

End Socialism while there is still a middle class left...

Sep 19, 2011 5:36PM
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Yeah right - There will NEVER be enough money to satisfy the BIG PIGS in Washington and the White House who always have enough money for their pet projects and pals!!!  And who have ROBBED Social Security for 80 years by ONLY paying 1.72% interest on the money we paid into the fund - which does not even exist thanks to our government taking it ALL and including it into their REVENUE !!!  Then if we pay taxes on Social Security payments they throw that money into the general revenue fund also - not back into the Social Security Fund !!!  What a bunch of overeducated Socialist turkeys !!!   Vote them out NOW !!!
Sep 19, 2011 5:07PM
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@Ghostwriter59...as one who until recently fell in that over $250K group, I find your thinking to be rather myoptic.  Working hard and saving does not ensure success.  There are many college educated, hard working, honest and austere people who, after an untimely layoff, need those government subsidies that are often painted as going to the "unworthy".  Furthermore, I know that if your taxes go up, the net extra you'll pay is about $3,000 more than you did previously assuming you make about $300k.  $3k is not noticeble at that income level, especially if it helps right the economic ship that every American is on.  Your "take my ball home" attitude is rather self serving when you consider that your "wealth" is not just the result of your work.
Sep 19, 2011 3:35PM
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Depends on who is being taxed. If the Bush 2 era tax cuts expired when Bush himself had said they were to expire, that would have helped our economy.

 

It's unbelievable that the GOP controlled congress actually is against payrolll tax cuts for the middle class and working poor. Sorry for repeating myself.

Sep 19, 2011 4:25PM
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  Anyone who believes that giving the uber-wealthy a tax break will stimulate the economy has been smoking some powerful stuff.  The majority of the wealthy don't make that wealth the old-fashioned way.  The few who create jobs and businesses are currently holding onto that money or investing in OTHER countries.  Giving them a tax break is like giving ballplayers MORE steroids.  Reduce the corporate rate from 35 to 24..... but enforce it.  GE alone would make a sizable dent in the trillions we squandered in Iraq. 

  And where do these anti-tax people think the money will come from?  It's not the taxes that need correcting.  It's the accountability.  We've never had corruption-free politics in this country.  Maybe it has more to do with believing that our Founding Fathers had some magical ability to see into the future and rather than adapt our country to the evolving world we hung everything on life in the mid-1700's because we thought we invented democracy.  It's obviously not a perfect system but it beats the rest.  It can be improved and modernized, but it won't happen on its own.  We're at a point where we can't let the libs push us into a make-believe world or let the cons drag us back to a time that exists mainly in distorted memories.  We need to face reality and that, for some folks, is terrifying.  

Sep 19, 2011 4:30PM
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Hey folks, the rich say they do not mind a Tax increase only because they know it will never happen...  But lets look at the real problem.  We the people, not just the government, have been digging a grave in our economy for a very long time. If we don't wake up, we're doomed to China and India.   We have sold our ways and how too's abroad and now we import what we should be producing.  Want to raise Taxes? Raise the import Tax on all imports to help offset our decline in manufacturing.  Force Unions to reform wages allowing widget jobs to return to the United States. Health Care for all? Why? If one religion or faith is allowed to receive free Health Care, Then we all do. Muslims should pay no matter what there beliefs may say or they should return home when ill.
I know this is somewhat off track from the subject matter, but this is whats really on most minds in America. Keep in mind, China is very smart country and is allowing some free trade within there Social Government only  to louver in new industry and China will fight to retain the power over the world.
Sep 19, 2011 4:07PM
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Why is it when it comes to education....people think that the federal government has to just keep throwing money at it to fix the problem?  I went to a parochial grade school and high school.....they were definitely low budget schools....but excellent quality of teachers....they had no unions...but truely cared about teaching.
Sep 19, 2011 3:03PM
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Even if they do, I still want Obama to proceed with a beginning to taxing the rich for their fair share.  As a former life-long member of the GOP, who gave up in disgust with the Republican Party's overt pandering to the nation's wealthiest 1%, I would just as soon see all of us go down the tube, if that's what it takes.  This phony baloney, trickle down economics, should quietly be forgotten for the stupidity it represents.  Sadly, I don't feel we middle class traditional Americans are fairly represented in either the Congress or by President Obama.
Sep 19, 2011 3:32PM
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The production of wealth is and has always been dependent on a worker class.  I dare you to find an exception.  Now is no different.  The problem with this generation is that Americans want wealth but none of them want to accept being the worker bee.  

Previous generations didn't have iPads, flat screen TVs, PS3s etc.  And this generation still complains because they don't have free healthcare and cheap education.  

The standard of living for this generation is higher than any previous generation in history.  Yet it may be the least content.  You can't have it both ways.
Sep 19, 2011 2:02PM
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It's what happens when the rich get a pretty good ride out of the past 30 years.  Unfortunately it doesn't trickle down, Uncle Sam comes and collects because no one else has the cash to collect.

 

Any economy is a delicate balance.  We've squandered it with great imbalances long time ago.  And we were set up to be a leading force for a few centuries after WWII, already in decline only 70 years later.  Not even century.  And I strongly think our technology was paving the way for sustainable growth for the world.  Throw that back, and open up the world still using unsustainable practices, resources will only get scarcer. 

 

By the way, I'm not eco nut.  I dislike the EPA, some of the things that agency does is completely dim witted in my opinion and potentially part of the problem.  But I do like businesses, which pretty much all of them have been developing better efficient methods of waste control, energy conservation, renewable energy methods, and recycling. And we have the worlds largest supplies of most resources including fossil fuels. 

 

But I have some faith and hope left in me, things will turn around.  Because the other possibilities will make us.  I just hope it won't be too painful or resort to all out weirdness.

Sep 19, 2011 5:24PM
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When the economy was doing very well after the Clinton years, the Republicans reasoned that there should be a tax cut for the wealthy...ok, I'll take that.
Now several years later the economy is suffering, the Republicans are saying that there should be more tax cuts. So something here doesn't add up. If we're lowering taxes when the economy is booming, then it must (or should follow) that we raise taxes (on the wealthy that is) when the economy is suffering. When you're doing well cut taxes, since you don't need the money. When you're not doing well, cut taxes to hep growth and when growth comes, cut taxes because you don't need the money...that seems stupid?
About time the taxes were raised.

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