Tax Hikes Threaten Main Street

Donald Lambro
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Posted: Mar 04, 2009 12:01 AM
Tax Hikes Threaten Main Street

WASHINGTON -- President Obama's big-spending 2010 budget is filled with tax provisions that will stunt economic growth, job creation and new-business formation.

It's bad enough that his soak-the-rich tax increases will have a negative impact on ordinary workers, but worst of all, he'll raise them when the U.S. economy will still be in a recession or in the difficult process of attempting to climb out of one.

He intends to keep all of the Bush tax cuts except the two top tax rates, which he will let expire at the end of 2010, one year after the White House says the economy will have shrunk by at least 1.2 percent and likely a lot more. This means that coming out of a recessionary 2009, when the Federal Reserve forecasts unemployment will shoot to 9 percent or more, Obama will be raising taxes on investors and small businesses -- the very people who create jobs.

This will be the bleak result of letting the two top income tax rates rise in January 2011: from 33 percent to 36 percent and from 35 percent to 39.6 percent, or more than 40 percent when state taxes are added. But how does this impact ordinary Americans?

"According to Internal Revenue Service data, half of all business income is taxed at individual rather than corporate tax rates, and about two-thirds of all flow-through business income is earned by small-business owners with annual incomes exceeding $200,000," said economic adviser Cesar Conda.

"The bottom line: Up to one-third of all business income is taxed at the two marginal rates Obama wants to raise," Conda told his business clients.

With the unemployment rate at 7.6 percent, the highest in 16 years, this is no time to raise taxes on small businesses, the engine of job growth in the country. Or even telegraphing that he intends to do this at this end of the year.

"President Obama may propose tax hikes not take effect until 2011, but the fact is they already are depressing economic activity in the middle of the recession," said Alison Acosta Fraser, director of the Heritage Foundation's Roe Institute for Economic Policy Studies.

"Facing higher future taxes, businesses, investors and savers reduce their activities today," she said in a recent study.

But Obama's demands for more tax revenue don't stop there. He wants a 2 percent to 4 percent payroll tax surcharge on taxpayers earning more than $250,000 to boost Social Security surpluses (which the government spends). And he wants to restrict the itemized tax deductions for this same group of taxpayers, which would push their income tax rate up by another 7 points.

Then there are Obama's rosy economic-growth projections next year that have raised eyebrows among many economists who think we are in for a period of slow growth coming out of this recession, especially if his draconian tax hikes are enacted.

In a cook-the-books effort to boost future revenue numbers to make it look as if he will cut the deficit in half, his budget predicts the economy will grow by an astounding 3.2 percent in 2010, followed by an even stronger 4 percent growth in 2011, 4.6 percent in 2012 and 4.2 percent in 2013.

In reality, the consensus forecast by Blue Chip Economic Indicators last month predicted the gross domestic product would fall by nearly 2 percent this year, and rise by an anemic 2 percent in 2010, and about 2.9 percent in 2011 and slightly less thereafter.

Economic forecasters foresee the economy rebounding in a U-shape rather than a V-shape. "I think this downturn is going to last longer, and the rebound will be fairly anemic," California State University economics professor Sung Won Sohn told the Associated Press.

The sharp downturn in the fourth quarter deepened the recessionary outlook for the foreseeable future. In a letter to Berkshire Hathaway shareholders, legendary investor Warren Buffett wrote, "The economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond."

It is in the realm of possibility that the economy will be making a comeback of sorts in 2010, but it will probably be in the recovery stages for sometime to come. This means the economy will need all its oars in the water pulling at the same time, and that means lower tax rates across the board and postponing any large, costly social programs like healthcare reform until the economy is on solid footing.

Even Democrats in Congress are complaining about Obama's budget proposals.

Senate Budget Committee chairman Kent Conrad, Democrat of North Dakota, has been one of the chief critics. "I am concerned about the long-term buildup of debt," he said last week. He also doesn't like some of the president's tax increases on wealthier Americans, such as cutbacks for tax deductions for charitable contributions. "I would put that high on the list of things that will be given a thorough scrubbing and may well not survive."

So it's not just Wall Street that has given Obama's economic policies a huge vote of no confidence. Democrats are having their doubts, too.