Thursday, February 26, 2009

Limits of redistribution

Barack Obama has an enormously expansionary fiscal program to get demand moving but promises to halve the budget deficit by the end of his (first) term.  This is a tricky promise to deliver on since he has also guaranteed not to tax US households earning less than $250,000US an extra cent.  3.8 million Americans earn more than $200,000 (the $250,000 point is not configured) and paid $522 billion in tax in 2006.  The top marginal rate is 35% and Obama is proposing to raise it only a little to $39.6%. One can see that this would yield something less than about another $68 billion* which is more than a fair bit short of the $1.5 trillion deficit that many expect will prevail over the coming year.

To pull off the halving of the deficit the tax hikes would either need to be draconian (the WSJ argues that even 100% taxes on the top 2% of income earners would not do the trick)  or otherwise taxes will have to be increased on people earning much lower incomes as well.  Nor will unwinding the war in Iraq do the trick though it will help.

Don't forget either that Obama has some fairly large spending plans in health, alternative energy and infrastructure.

I don't think that the good President Obama's economic policies are internally consistent.  I think this guy has the potential to be a great President but he should level with the American people.  They will need to pay much higher taxes to fund the current expansionary moves.

* This is optimistic since many will experience income losses as a consequence of the recession.

Update: Paul Krugman takes a slightly more optimistic view. He notes that the budget will benefit from $645 billion (over the next decade?) and from the sale of emission quotas - a very promising sign. He also notes with approval $634 billion devoted to health reform.But Krugman also notes"And even if fundamental health care reform brings costs under control, I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class. Whatever politicians may say now, there’s probably a value-added tax in our future".

6 comments:

observa said...

That one inconsistency alone should tell you he's another empty suit Harry. He's got the gift of the gab though which is why the usual suspects are fawning at his feet for the time being. Mind you I don't envy the Obamessiah's task.

Tim said...

Don't forget that letting the tax cuts expire also means that capital gains tax goes back up to 20% (from 15%) and that exemptions high earners get on mortgages and donations are cut. It still won't make up the shortfall but it should therefore raise a lot more than $68bil.

Anonymous said...

I have been selling things for years. Always undersell. Always deliver more than you promise. Obama has oversold his customers (voters). He has no hope of delivering what he promises. When he faces re-election the Republicans will remind him of this, ad nauseam. Geoff

conrad said...

I think they should wind back their war machine all over the world. If they took away most of their European contingent, it would force European countries to police their own area (and they'd be able to export more arms to Europe). The same is true of Japan. In addition, they should withdraw from all unwinnable situations, like Afghanistan. I think there's huge amounts of money to be saved from less war mongering if they want to . If some shitty country half way around the world wants to oppress their own citizens, I don't see why they should feel obliged to pay huge amounts and die for them.

jc said...

Harry:

I don't know why you're even equivocating about Obama. His policies are a disaster producing a massive deficit of around 12% of GDP.

He's just a dressed version of Hugo Chavez.

observa said...

The Mogambo Guru-

"I thought I was still asleep and merely dreaming when I opened up Barron's and saw that the earnings of the S&P 500 have dropped to US$28.75, which is down from last week's $45.95, which is down from last year's $78.80.

In case you were wondering, this level of earnings is down to where it was in 1995, and at that time the S&P 500 was selling for about $450, versus today's $770, and which makes the price-to-earnings soar to an almost-unheard-of 27! A P/E of 27! Hahahaha! So you can see why I thought I was dreaming!

This evaporation of earnings also probably explains why the S&P 500 index is at $770.05, down from last year's $1,353.11, meaning that if you had bought the index last year, you have lost almost half your money in nominal terms, and you have lost ever more when calculated in inflation-adjusted terms, as the dollar has lost buying power in the last year...

..the fact is that it is worse than that, because the USA, with its $14 trillion economy, has a federal government that is going to spend, over the next year, all the money in their usual $3 trillion-plus budget, but also another $2 trillion or so over the next year - $5 trillion in government spending, at a cost of $3 trillion in new debt, all in a $14 trillion economy! Gahhhhh! We're freaking dooooooooomed!

I did not mention that there are only about 100 million non-government, non-taxpayer paid workers in the US, which means that there are only 100 million workers who can make a profit with which to pay taxes, which means that $5 trillion in government spending is a staggering $50,000 for Every Freaking One (EFO) of those non-government, non-taxpayer paid positions! And you think THAT is going to work out for the best? Hahahaha!"

Oh great Obamessiah eh?