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  • Consequences of Obama Tax Plan: Slower Output, Job Growth

    The Heritage Foundation recently published an evaluation of the candidates’ tax plans. This analysis assumed the tax reductions of 2001 and 2003 expired on schedule, or at the end of 2010, and that each tax plan reacted to what would be a very large tax increase if Congress and the president do nothing. Our paper finds that John McCain’s tax plan, which makes all of the tax reductions permanent (among other things), produces more than twice as much economic activity as Barack Obama’s plan, which makes those tax reductions permanent only for taxpayers with incomes below $250,000.

    The current law baseline that we used in this recently published analysis is not the only baseline that analysts employ to study the effects of policy change. Many, including other members of Heritage’s budget team (see JD Foster’s work here and here) and analysts on the Obama campaign staff, sometimes use a “current policy” baseline. That baseline assumes that current policies, like the Bush tax reductions, continue forward. Obama assumes “current policy” on spending and “current law” on tax policy.

    I frequently have been asked since that publication what difference it would make to both plans if an alternative assumption is made about the fate of the Bush tax cuts. Specifically, what would be the likely economic effects of Obama’s tax plan if one assumed the current policy baseline, or that the Bush tax reductions were made permanent, say this year? For McCain, that alternative assumption means the principal remaining change to tax policy is his massive reduction in the corporate profits tax, from the current level of 35% to 25%. That tax reduction alone raises employment by an annual average of 182,000 and economic output by an average of $35 billion. However, the rest of his tax plan is, in fact, making the Bush tax cuts permanent, which the alternative scenario assumes that Congress already has done.

    For Obama, however, the effects are quite different. Some of his current plan is covered under the alternative assumption: most of the Bush tax reductions are made permanent for taxpayers under $250,000. However, Obama raises ordinary income tax rates for taxpayers above $250,000 and also raises the tax rates on dividend and capital gains income as well as federal death taxes. In addition, he creates a number of new and expanded credits and deductions for taxpayers below that income level that are not contained in the Bush tax program.

    The tax increases, however, overwhelm the expanded credits and deductions. The upshot is much slower output and employment growth than in an economic world where the Bush tax reductions are the permanent law. For example, over the 10-year forecast period, 2009-2018:

    • Inflation-adjusted Gross Domestic Product falls by an annual average of $90 billion below what it would be without the combined effects of Senator Obama’s tax increases and tax credits;
    • Total employment falls by an annual average of 589,000;
    • The after-tax, inflation-adjusted disposable income for a four-person family declines by $1,565;
    • Inflation-adjusted personal consumption spending drops by an average of $66 billion per year, and personal savings drops by an annual average of $54 billion;
    • Business borrowing costs rise, even though we allowed the Federal Reserve to react to this worsening economic situation by cutting the Fed’s federal funds rate.

    The Obama tax increases hit capital costs particularly hard, which reduces investment and creates significantly higher borrowing costs for businesses at all levels. These effects combine with declines in savings, consumption, and labor effort to produce significant economic consequences outside of the targeted class of taxpayers. Thus, families whose incomes exempt them from the higher Obama taxes still feel the pinch of these taxes through a slower job market an increasingly sluggish income.

    Posted in Economics [slideshow_deploy]

    9 Responses to Consequences of Obama Tax Plan: Slower Output, Job Growth

    1. dfelton says:

      Please vote for Bob Barr, the Libertarian Party candidate for president.

      Why vote for McCain? He voted for the bailout, just like Obama. And both McCain and Obama voted for US government investment in big commercial banks, which is socialist. This is Socialism, maybe even Communism.

      So, we should send a message to both parties that we have decided to vote on principles? It is time to vote on principles. YES, we should!

      Only Bob Barr is moral enough and conservative enough to deal with the issue of housing, Wall Street, and the rest of the current mess. He has not taken a cent from Fannie or Freddie or from any of the Wall Street firms that profit from the bailout. And Bob Barr has the support of Rep. Ron Paul, who did so well in the Republican primary debates.

      Here’s Bob’s Web site: http://www.bobbarr2008.com/

      Here’s a recent press release from Bob (who has the backing of Rep. Ron Paul):

      Press Releases › Wall Street Benefits Twice from Bailouts

      October 11, 2008 11:36 am EST

      Senator John McCain attempted to disguise reality by calling the $700 billion Wall Street bailout a “rescue,” but it’s obvious that the only people he and his colleagues were rescuing were the executives who had made bad investment decisions, as well as the politicians who had pushed increased mortgage lending, irrespective of cost, triggering today’s crisis. Now it turns out that the companies getting bailed out will benefit twice.

      Most everyone has seen the story of how executives at AIG partied at a resort after the taxpayers were stuck with the bill for an $85 billion bailout—now being supplemented with another Federal Reserve loan of $37.8 billion. But what’s $440,000, including more than $23,380 for spa services, among friends when the taxpayers are paying?

      Normally politicians wouldn’t have any business complaining about the cost of a corporate retreat, but what might be unexceptional for high-flying companies in a booming economy becomes outrageous when taxpayers are getting stuck with the bill. In this case they are paying twice, with the company collecting a new loan because its bottom line is even worse than originally thought.

      Loan-two to AIG is small change compared to the extra benefits that Wall Street will receive. Many of the largest firms will be going to the spa, figuratively, at least. You see, someone has to manage all of the securities and other assets that the government plans on buying with taxpayer funds. And who better to manage them than the very companies that bought the bad paper in the first place!

      The Treasury Department has requested proposals for asset managers, and according to the Wall Street Journal, the government “wants large, established firms with significant assets to work for the government’s program.” That means managing at least $25 billion, and in some cases at least $100 billion, in private assets. There will be a lot of money in fees—typically 1 percent of the assets managed, which could come to as much as $7 billion a year or more if government purchases go past $700 billion, as is widely expected.

      Wall Street is looking forward to milking this latest cash cow. Since government jumped into the investment business, the Journal tells us that “a range of firms—from large investment banks to boutique real-estate companies—have been angling to grab some of the advisory business.” Representatives of some companies showed up in Washington to lobby even before Congress approved the bailout. And who can blame them? The Journal reports that “sales, financing and other traditional forms of real estate business have dried up with the credit crisis.”

      Of course, most of these firms helped cause that very crisis. Most of the companies bidding for government business are suffering big losses and preparing to unload lots of bad paper on the government. Bad paper that other big companies with big losses and lots of bad paper will manage.

      And so the circle will go on endlessly, at taxpayer expense.

      The only problem is potential conflicts of interest, since companies will, notes the Washington Post, “be managing the assets while also selling their own troubled securities to the government.” But officials say they will attempt to “minimize” any conflict. No doubt, Washington won’t let a little thing like ethics stand in the way of letting everyone on Wall Street profit.

      Indeed, politics are starting even before the president’s signature on the bill is dry. One analyst predicts that the Treasury Department will focus bailout funds on regional banks and thrifts, thereby providing “critical political support for Treasury’s efforts.” After all, “Congressmen who had to swallow hard to vote for this think will feel a lot better about it if they see the impact in their local communities.” Which is just another name for pork, like the spending programs and tax preferences loaded into the $700 billion bailout bill to win votes for passage.

      All of this is politics as usual in Washington, and it won’t change whether Sen. Barack Obama or Sen. John McCain is elected president. Both of them supported the $700 billion Wall Street bailout, as well as the many other bailouts that preceded it. Both of them are part of the political establishment that helped create today’s economic problems. Neither of them will take the steps necessary to ensure that this sort of economic crisis doesn’t hit again. Only Bob Barr and the Libertarian Party are offering the sort of fundamental change that the American people need and deserve.

      And here’s an article about the upsurge of interest in Bob Barr from the Atlanta Constitution:

      The Wall Street debacle and the Barr effect

      Friday, October 10, 2008, 04:20 PM

      The Atlanta Journal-Constitution

      Just checked in with Russ Verney, the campaign manager for Libertarian presidential candidate Bob Barr.

      Verney said the Wall Street crash and bailout has revived Barr’s standing as a factor in the 2008 presidential race.

      “We’re seeing an enormous amount of activity coming in from the web site, from people opposed to the bailout,” Verney said.

      Many are die hard Republicans, he said. “They’ve had it, they’re coming over and they’re bringing their friends.”

      This low-key but effective criticism of the $700 billion Wall Street rescue, videotaped in Barr’s Smyrna headquarters and posted on YouTube, is driving much of the traffic.

      Verney said Barr’s new standing in the presidential campaign remains hard to measure. “Most of the polling eliminates us,” he said — under the label of “other.”

      Here’s Bob’s Web site: http://www.bobbarr2008.com/

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    6. BEllison, Omaha says:

      The problem with a vote for Barr right now is that at this point – with Obama head in polls – a vote for Barr takes away votes from Obama's main adversary, McCain. Even though McCain has advocated big government, McCain's economic policies would be so much better than Obama's. Barr, unfortunately, doens't have a shot. Although his economic policies may be preferable to both Obama's and McCain's, I just don't see how we can afford to have Obama in the White House. I feel like, at this point, we have to vote McCain to prevent an Obama presidency. Barr supporters – your vote for McCain now will help preserve some semblance of conservative & libertarian for the next 4 years than will a vote for Barr.

    7. bruce mace says:

      The fact the economy is a worry on everyones mind should we really trust what the canidates are telling us about their tax policies. Hanlon has been bashing McCain for the last couple weeks but now he starts an attack on Obama's tax plan. It also has links to a tax caluclator that would show you how much your family would be effected. Interesting read.


    8. Kristina, Gloucester says:

      Look, we have another election where we are faced with two candidates – the lesser of two evils. I found Bill Beaches' analysis refreshingly – just about the numbers and it points out the truth that there is at least some good that can come out of McCain's plan, if he sticks to it and doesn't compromise. What we now have to vote for is someone who might possibly listen to us – between these two top prospects. We'll have more luck with McCain because he at least will attempt to listen. (For as much of a track record of going against conservative values, he has actually backed down and supported others.) Our ideas are foreign to Barack Obama's world view and he will not compromise – he will never admit that his ideas are wrong, or are based in a flawed philosophy – that is the most dangerous. They will never admit that it is wrong – only that WE are wrong, and not generous enough.

    9. Pingback: Who’s Best For the Economy? « Tales From The Vinyl Village

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