ACRU General Counsel Peter Ferrara wrote this column appearing November 10, 2010 on The American Spectator website.
Let us survey the wreckage of Obamanomics, which followed in detail the opposite of every policy of Reaganomics.
Unemployment has been near 10% for over a year now, after reaching 9.7% in August 2009. The Bureau of Labor Statistics reports the U6 unemployment rate, which includes the unemployed, those marginally attached to the labor force (discouraged), and those working part time for economic reasons, at 17%, nearly the highest since the Great Depression.
African Americans suffer long-term, depression-level unemployment of nearly 16%, Hispanics 12.6%, teenagers 27.1%. The employment-population ratio, the percent of Americans with jobs, has spiraled down from over 63% in 2007 to 58.3% today.
Nearly 15 million Americans are unemployed, over 40% of those, 6.2 million, unemployed for over 6 months, also the highest since the Depression. Another 2.6 million were marginally attached to the work force, having looked for a job in the past year and given up. Another 9.2 million are working part-time “because their hours had been cut back or because they were unable to find a full-time job.” That leaves 26.6 million Americans unemployed or underemployed.
The Census Bureau reports that 44 million Americans are in poverty, the highest in the 51 years it has been keeping records. A record number of Americans are on food stamps, and under Obamacare soon a record 85 million Americans will be on Medicaid, the health care program for the poor. In September, a record 100,000 Americans lost their homes in foreclosure.
Before this latest recession, as previously noted in this column, U.S. recessions since World War II have lasted an average of 10 months, with the longest previously being 16 months. This latest recession started in December 2007, 35 months ago. Even if the recession technically ended last summer, America should not be suffering all this economic misery nearly 3 years after the recession began.
Quite to the contrary, historically the American experience has been the worse the recession, the stronger the recovery. Real economic growth in the first 4 quarters of Reagan’s recovery from the deep 1981-82 recession was a whopping 7.7%. Even the recovery under President Ford from the deep 1973-74 recession sported real economic growth of 6.2%. A similar boom was generated after the 1960-61 recession by the Kennedy tax rate cuts, even though that recession was not so severe.
But under President Obama’s policies, the downward spiral in economic growth has already begun again. Real GDP growth has fallen from 5% in the fourth quarter of 2009, to 3.7% in the first quarter of this year, to near 2% in the second and third quarters. Indeed, more than a year after the recovery supposedly got under way, GDP is still below its previous peak in the fourth quarter of 2007. By contrast, in the Reagan recovery, the economy soared past its previous peak in 6 months.
This is the result after 3 years of historically easy, expansionary, Fed monetary policy, with interest rates at record lows near zero percent. There is nowhere for those rates to go from here but up. The economy this year has also benefited from the specter of Obama’s sharply increasing tax rates starting next year, causing producers to scramble to earn what they can before the grim reaper arrives. The increased regulatory costs of the EPA’s developing anti-carbon crusade, financial reg reform, and Obamacare will also push the economy down not up next year.
This is all why the Fed recently announced that it is going to bring back inflation to try to revive the economy. That shocker is already causing chaos in the markets, with gold soaring to new records, well past the S&P 500, the dollar steadily declining, and commodity prices spiking, including ominously oil.
Of course, this Fed reflation is not going to work either, because as Milton Friedman explained long ago, easy money from the Fed does not change the real economy. It is just going to bring back the 1970s with a vengeance, combining long-term stagnation with inflation. This is the result of President Obama’s stubborn, Rip Van Winkle return to the Keynesian economics of the 1970s, play acting like nothing has happened since 1980 to prove how brain-dead those economic policies are.
Dr. Obama’s Marxist Elixir
In this economy, President Obama’s plan is to increase the top tax rates on the nation’s employers and investors for every major federal tax, starting on Jan. 1. That includes a nearly 20% increase in the top two income tax rates, counting the phaseout of deductions and exemptions. The top capital gains tax rate is scheduled to soar by nearly 60%, counting the application of Obamacare’s new 3.8% tax on investment income. The tax rate on dividends is scheduled to nearly triple, from 15% to 43.4%, counting the new Obamacare tax as well. The Obamacare legislation also increased the Medicare HI payroll tax rate by 62% for higher income earners. The death tax would also be restored with a 55% top rate.
Does that sound like what our country needs right now? Is that going to create jobs, or lose jobs? Art Laffer explained earlier this year what we can expect from such a tax tsunami,
[W]hen the U.S. economy comes to 2011, the train’s going to come off the tracks…. The tax boundary that will occur on January 1, 2011 tells me that GDP growth in 2010 will be some 6% to 8% higher than GDP growth in 2011. A year on year decline from trend of some 6% to 8% in GDP growth would represent a larger collapse than occurred in 2008 and early 2009.
President Obama says we have to do it because we need the money for the deficit. His budget projects that these tax increases would raise $678 billion over the next 10 years. We can’t borrow that money from the Chinese to pay for these tax cuts for “the rich,” Obama says. But if these comprehensive, across the board increases for every major tax push Obama’s downward spiraling economy into another, double-dip recession, the federal government will be hemorrhaging revenue rather than gaining revenue. The deficit will soar to over $2 trillion, and America really will be just another country, just like Greece.
Even without another immediate recession, these tax hikes would be unlikely to raise significant revenues. As we have previously discussed here, the top 1% of income earners already pay more in federal income taxes than the bottom 95% combined. Trying to browbeat still more taxes out of them is not going to work. Moreover, in the past 40 years, every time the capital gains tax has been raised, capital gains revenues have declined (while every time the capital gains rate has been cut, capital gains revenues have increased).
In 1968, a 25% capital gains tax rate generated real capital gains tax revenues of $40.6 billion calculated in 2000 dollars. The capital gains tax rate was then raised 4 times in the next 7 years to 35%. By 1975, at the higher rate, capital gains revenues totaled $19.6 billion in constant 2000 dollars, less than half as much.
In 1978, the capital gains tax rate of 35% yielded $29.9 billion in 2000 dollars. The rate was then cut 3 times to 20% over the next 4 years. By 1986, the new rate, 43% lower than the 1978 rate, raised $92.9 billion in 2000 dollars, about three times as much. The capital gains rate was raised by 40% the next year, to 28%. Capital gains revenues fell to $56.2 billion that year, and declined all the way to $34.6 billion by 1991.
In 1997, Congress cut the capital gains tax rate from 28% back down to 20%. Despite this almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999. Revenues over the period 1997 to 2000 increased by 84% over the projections before the tax cut.
Finally, Congress cut the capital gains rate from 20% to 15% in 2003. Capital gains revenues doubled from 2003 to 2005, despite this 25% cut in the rate. Revenues increased by $133 billion during the years 2003 to 2006 as compared to pre-tax cut projections. President Obama’s capital gains tax increases will only add to this historical record, resulting in less revenue rather than more.
Restoring Economic Growth and Prosperity
Stopping the Obama tax hikes would just be a down payment on restoring prosperity. Indeed, we must stop all the myriad of tax increases the Obamaniacs have already scheduled under current law. That would involve not only permanently extending all of the Bush tax cuts, which would eliminate the death tax as well as continuing the lower Bush income tax rates for everyone, and stopping the return of the marriage penalty. It would also involve eliminating the Alternative Minimum Tax (AMT), which was adopted at the end of the Johnson Administration to ensure that the very wealthiest could not avoid paying any income tax. Over the years, of course, that tax has come to apply to more and more of the middle class, which Congress has been preventing only by adopting stop gap patches every year delaying application of the tax. It would only be abiding by Obama’s Campaign 2008 pledge not to raise taxes on anyone earning less than $250,000 per year to eliminate the AMT permanently.
Stopping the tax hikes would also mean repealing the tax increases in Obamacare. That includes the 60% increase in the Medicare HI payroll tax for upper income earners, and the application of that tax to capital gains and other investment income, which adds up to taxing capital income 5 or 6 times. (Liberals need to learn that you can’t have capitalism without capital before we ever trust them with the keys to drive the economy again.) It would also involve ditching as well both the employer and individual mandates, which are also effective taxes.
For long term prosperity, we need to go beyond this to cut the federal corporate income tax rate for America to be internationally competitive again. America now suffers the second highest corporate income tax rates in the industrialized world, with the federal rate at 35%, and state corporate income taxes increasing that on average to nearly 40%. The average corporate tax rate in the European Union has been slashed from 38% in 1996 to 24 % today. Germany and Canada are headed to rates below 20%. Ireland has a corporate tax rate of 12.5%, which has caused per capita income to soar from the second lowest in the EU twenty years ago to the second highest today. Our own Treasury Department has said Ireland raises more corporate tax revenue as a percentage of GDP than we do with our much higher rates. Corporate tax rates in India and China, our emerging competitors, are lower as well.
I would lower the federal corporate tax rate to 15%, leaving America’s rate competitive at just under 20% counting state rates. If corporate loopholes are reduced as well, this rate reduction could lose little if any revenue. If the economy booms, the result could be more revenue rather than less. Over the longer run, America needs an individual flat tax of 15% as well, with a generous personal exemption of $10,000, exempting the first $40,000 of income for a family of four. We also need immediate expensing for capital investment, replacing drawn out depreciation deductions.
Beyond that, restoring a long-term economic boom requires a stable dollar. That can be accomplished just by terminating the Ben Bernanke disaster and replacing him with Stanford University Professor John Taylor, who knows what to do. We also need to unleash the private sector to produce an abundant, reliable supply of low cost energy, and avert the other unnecessary, crippling, regulatory costs of the Obamunistas, such as the EPA’s overwhelmingly burdensome carbon regulation that the Administration is brewing up.
Balance the Budget by Cutting Spending
Once we adopt the tax code that would maximize long-term economic growth, then we need to restrict spending to fit within the revenues produced by that code. That would begin by returning spending for all federal budget items except Social Security, Medicare and Medicaid to their level in fiscal 2007. That was just 3 years ago, and America survived just fine with that level of federal spending. I estimate that by next year, this alone would save close to a trillion dollars a year!
Repealing Obamacare would save well over a trillion over the next 10 years, and at least $2 to $3 trillion over the next 20. Of course, we need to terminate all unspent stimulus funds, as well as all outstanding TARP and other bailouts, and break up and privatize Fannie Mae and Freddie Mac, sans loan guarantees and subsidies. We should also block grant the Education Dept. back to the states. We should merge the Departments of Agriculture, Commerce and HUD, and merge the Energy Dept. into Defense, eliminating outdated and unnecessary components in the process.
Then we need a determined assault on corporate welfare and President Obama’s crony capitalism political machine. That would involve freeing all forms of alternative energy to compete in the marketplace, which means ending all subsidies, guarantees and mandates that do not apply to all other forms of energy. It would also involve eliminating the Overseas Private Investment Corporation (OPIC), the Export-Import Bank, and all federal agriculture subsidies.
With modern satellite TV and radio, we also don’t need to be borrowing money from China to finance National Public Radio (NPR) and the Corporation for Public Broadcasting. Cut them loose to compete in the private market on their own. Ditto that for Amtrak.
Longer-term entitlement reform would involve returning the other 184 federal means tested welfare programs back to the states, as we did with the old AFDC program in 1996. We should also start allowing workers the freedom to choose to finance at least part of their Social Security and Medicare benefits through personal savings, investment and insurance accounts, eventually expanding those accounts to finance all of the benefits now financed by the payroll tax. That would allow us to eventually phase out the payroll tax entirely, replacing it with a personal savings and investment engine for every family in America.
That would restore another generation-long, 25-year economic boom, and traditional, world-leading American prosperity.