President Obama proposed $634 billion in new taxes on ‘wealthy’ Americans as well as cuts in government spending to pay for an expansion of the healthcare system. Among the tax increases will be a reduction in both the value of mortgage interest deduction and charitable contributions for folks in the highest tax brackets. Currently, households in the 33% and 35% tax brackets can claim deductions at those rates; however under Obama’s plan those deductions will be capped at 28%. If a household in the 35% bracket pays $10,000 in mortgage interest or makes a $10,000 contribution to charity, $3,500 in tax savings results. Under the new plan, tax savings would be capped at $2,800 effectively raising taxes without raising the tax rate.
Obama also wants to:
- Bring back the top bracket of 39.6%, increasing the top rate from the current 35% level.
- Increase premiums on ‘wealth’ folks who are participating in the Medicare prescription drug program just like these same folks do now to participate in Medicare.
- Implement a ‘cap and trade’ program to battle global warming – effectively auctioning the right to emit perceived pollutants. Without such a permit, businesses would be prohibited from such emissions.
In a moment of honesty, the administration admitted the $634 billion raised by these tax increases would not be enough to pay for the proposed healthcare expansion; adding the shortfall would be made up from new efficiencies in existing programs to raise enough money to cover the $1 trillion dollar price tag. As has become customary with Washington politicians (this administration is no different), details of these new efficiencies were lacking with the Obama administration stating these new taxes are only a down payment on the project and the administration would work with congress to find the balance of the funds needed.
As for the trillion dollar health care expansion itself, Mr. Obama’s budget contains few details as to how the money will be spent (sense a recurring theme here?). A ‘Wall Street Journal’ article published recently noted -”the administration will release only general guidelines Thursday. Among them: Americans should have a choice of health plans and be allowed to keep their employer-sponsored plan if they wish to. It also says the plan should “put the United States on a clear path to cover all Americans.” (Source for all information above: ‘The Wall Street Journal’ February 26, 2009)
Mr. Obama is also proposing a large number of tax increases in his 10 year blueprint including letting the tax cuts instituted by Mr. Bush expire in 2011 and the proposed blocking of the expiration of the estate tax as scheduled under current law. (Source: ‘Wall Street Journal’ February 26, 2009)
What could that mean?
A return of the $1 million estate tax exemption. The estate tax exemption is the amount of assets that can be passed from one generation to the next with no tax. This year, in 2009, the exemption level is $3.5 million.
The picture is clear – we are returning to an era of bigger government, more government control and higher taxes.
The notion that the government is going to identify efficiencies is laughable. In the history of our government; it hasn’t happened. And, given the caliber of the politicians we’ve seen in Washington over the past several years, there’s a better chance of the Cubs winning the next 10 World Series.
The end result of all these actions, in my opinion, will be diminished production, a dramatic reduction of collected taxes, and an extension of the current recession, potentially even bringing on a depression.
I hate to be so negative, but from where I’m sitting the facts are the facts.
In my blog entry of December 15, I cited a Bloomberg story that estimated our national debt had increased to $10.7 trillion from $9.2 trillion in a 12 month time frame and that liquidity injected into the economy had failed to produce positive results.
Obama is currently admitting to a $1.75 trillion dollar deficit on spending of almost $4 trillion for fiscal year 2010 and that doesn’t count the costs of ‘off budget’ items.
The chart below, created with information compiled by the non-partisan Congressional Budget Office, shows the projected budget deficit for this year potentially as high as $2 trillion, Bush and Obama can share in this ugly number with Bush releasing $350 billion in TARP funds and Obama releasing even more.
Add to this the projected deficit for 2010 and the printing of money by the Federal Reserve and the numbers are staggering.
The chart below puts these expenditures in perspective.
Adjusted for inflation, we’ve spent almost as much on the current bailout as we did for the Louisiana Purchase, the New Deal, WWII, the Marshall Plan, the Korean War, the race to the moon, the Vietnam War, the S&L Crisis, the invasion of Iraq, and NASA combined.
That’s massive additional debt accumulated in a very short time frame.
The bottom line is this. Debt has to be dealt with – you either pay it or you default on it.
With the level of debt at such extreme levels and economic growth virtually non-existent currently, paying the debt seems unlikely to me.
This past week, President Obama talked about fiscal responsibility and reducing the deficit to only $533 billion by the end of his first term. In a Bloomberg article published February 23, Obama was quoted as saying, “As our interest payments rise, our obligations come due, confidence in our economy erodes and our children and our grandchildren are unable to pursue their dreams because they’re saddled with our debts. That’s why today, I’m pledging to cut the deficit we inherited by half by the end of my first term in office.”
According to the Congressional Budget Office, the deficit for this fiscal year will be $1.3 trillion; however not all of this deficit was inherited. A little over a week ago, he signed into law a $787 billion package dubbed a stimulus package. That spending is on his watch.
While his actions so far don’t match his words, he is saying some things that are encouraging advocating a ‘pay as you go’ approach to government spending. In the same Bloomberg article, he was quoted saying, “The pay as you go approach is based on a very simple concept: You don’t spend what you don’t have. So if we want to spend, we’ll need to find somewhere else to cut.”
Sounds good doesn’t it?
But he’s not the first President to make such a comment and then promptly proceed to do exactly the opposite. Bush, before him set the same goal and then spent more than we could afford; I see no reason to expect anything different from Obama, although I was initially hopeful.
Fact is that if Obama was serious about tackling our debt problem, he’d quit adding to our debt NOW, not at some future date as is typical of politicians.
Debt is the cause of our problem – it cannot be a solution. The current deflationary environment (likely be followed at some future point by massive inflation for a period of time) has been caused by massive debt and until the debt is dealt with, the economic game won’t change for the better on a long term basis – all of this additional government debt simply makes the problem worse.
