Tax and Spend

If you listened to the SOTU speech last night (1/27) you had to wonder how Obama gets away it. How does this man, the supposed leader of the free world, the commander in chief of the US Military, the champion of democracy have the audacity to stand in front of the congress and all America and lie to us about how he is going to freeze government spending to reduce the deficit? Of course this is a rhetorical question as we all know him for what he really is; a pathological liar. He has lied to us about everything he promised to get elected, but let’s not beat a dead horse here, lets look at last night’s travesty.

He stood there and said he would enact a three year spending freeze on approximately one sixth of the federal budget. Sounds too good to be true, right? Right! It is too good to be to be true because it is totally false. First he excludes the biggest spending programs already in place: social security and medicare. Now don’t get me wrong, I am on both of these hand outs and like them but I will be the first to say that they do need changes and reforms. But that grist for another mill.

The overall freeze is phony given the spending levels already in place. In one year he has permitted a 23% increase in discretionary spending through the federal government. Its not rocket science to determine he has just given us the sleeves out of his vest. The EPA budget alone increased almost 35%! You can expect to see large increases in the proportion of GDP that is spent by the feds for years to come. Since 2008, the ratio of federal spending-to-GDP has risen by about 14%. From 2008 to 2009 we saw the greatest annual increase in spending in the last 30 years. In the name of stimulating job growth, the share of federal spending is now 24% of the economy, up from 21% in the last year of the Bush administration.

The recent growth in spending has been camouflaged by a focus on deficits. Budgets and proposed legislation, like that on health care, are being judged not by their impact on spending and taxation, but by their projected effect on the deficit. Equal increases in spending and taxes reduce economic growth, even if they do not alter the deficit.

So the rhetoric surrounding the health-care bills misses this point. Were they to pass, it would mean more spending, more taxes and less growth. Both the White House and Congress have discussed fiscal responsibility in terms of the bills’ effect on the deficit, not the amount of spending.

The health legislation that looked likely until Massachusetts voted last week included about $1 trillion in new spending, $500 billion in promised Medicare cuts, and slightly more than $500 billion in increased taxes. If the Medicare cuts were to materialize, then the bill would reduce the deficit because tax increases exceed net new spending. It is very unlikely that medicare will be cut by the proposed $500 billion as the dems would lose the votes of every perosn over 65, be they dem or GOP.

The Mayo Clinic in Glendale, AZ, a town with a high population of elderly people is already in an uproar. Mayo says that this is a “test case”. Don’t believe it. They have been turning away patients for years at the main Mayo in Phoenix. I know this because my neighbor was refused and had to pay by other means. When I look at my medicare I am appaled at how little the doctors and hospitals receive. This house of cards has to fall.

It is true that Mr. Obama inherited much from his predecessor, as the president and his surrogates are wont to remind us. There is no doubt that when the new team came in, the economy was in a deep recession and job losses were large. He inherited an unemployment rate that was over 7%. It now stands “officially” at +10% but the real number is closer to 15%. The job growth that was the promised outcome of the $787 billion stimulus bill has not and will not materialize. So the anointed one wants another one! How will that be paid for? And when job growth returns and unemployment falls, it will owe little to the stimulus.

Consider the legacies Mr. Obama will leave his successor. He grew the deficit that he inherited. He grew the government spending ratio that he inherited. And he has already promised to repeal the low tax rates that he inherited. Pure Keynesian lunacy. At this point, the question is how much and what form the tax increases will take. Part of the Bush legacy includes low personal tax rates, an average ratio of taxes-to-GDP of about 18%, low rates on capital gains, and a period of low estate taxes. I think we can kiss all these goodbye.

It will be virtually impossible for Mr. Obama to keep his promise not to raise taxes on the middle class while paying for an enormous increase in spending. Given the planned spending levels, taxes will have to rise substantially to get to the target 4% deficit figure that the White House wants. He spends, you pay.

Medicare tax increases on wages and dividends, and new levies on businesses, are already being discussed. In the longer run, we may see a push to introduce a federal value-added-tax. The VAT has been quite successful in the EU but it came at a cost. Other tax rates had to be reduced. Don’t look for that at a theatre near you very soon.

Let us pay close attention to the president’s message. But let us not be confused by promises of jobs, coupled with fiscally responsible sounding language that masks the underlying irresponsibility of budget decisions. Proposals that increase taxes and spending, even if they do not increase the deficit, will place a substantial burden on our recovering economy and on future economic growth.