Saturday, February 28, 2009

This Could Do It

The Obama budget could be the straw that breaks the camel's back. The "stimulus" package, which does nothing more than redirect money from future citizens to current citizens, cannot possibly stimulate anything other than a request for another round next year. Free money is hard to resist. The Obama package will be just one more hurdle for the forces of economic recovery to surmount. Obama's assault on legal contracts between borrower and lenders that goes by the quaint name "judicial cram down" will make things worse as well. Still and all the economy could survive these two Obama programs. The budget package is another story.

Obama's budget package is a truly massive new set of taxes on all American citizens, rich and poor. It is reminiscent of Roosevelt's tax increases that created a second depression out of the recovery from the first great depression. Why the Obama Administration thinks taxing Americans now is a good idea is perplexing.

The biggest Obama tax increase is the carbon "cap and trade" plan. Literally millions of Americans will lose their jobs if this plan is adopted and these losses will be permanent as the industries subject to the "cap and trade" will stagger to survive, which will be impossible without major new protective tariffs across the board. Even if these industries survive they will be a shell of their former selves. Prices of everything these industries produce will be much higher than currently, so that consumers effectively are being taxed through the much higher prices they will be forced to pay by impact of the Obama "cap and trade." It is much like a massive new national sales tax and has the same regressive tax features of any sales tax.

This is only the beginning. The details of how to extract the 14 percent savings out of the health care industry have not yet been provided by the Obama team, but health care stocks got the message as they collapsed last week as details of the Obama budget began to leak out. The estimated savings would represent an Obama tax on health care firms and citizens who have health care needs that could run as high as $ 300 billion annually. Another slap at middle Americans.

Note that "cap and trade" and the so-called health care savings represent an Obama tax on the average American, not on the rich. They are about the most regressive forms of taxation that you can find and both will Have a significant negative impact on employment levels. If these two measures pass it is hard to see how America will ever see single digit unemployment numbers again. These Obama taxes are not taxes on the rich. These Obama tax increases are direct assaults on the average American family and will have a devastating impact on low to middle Americans at a time when they are having great difficulty.

Finally comes the "tax on the rich." Anyone making more than $ 200,000 per year will be effected. Within that group are virtually all the small businesses in America. By labeling such enterprises as "rich" people, Obama is able to exploit the class warfare theme, but the effect will be the same as the other taxes mentioned earlier. There will be increasing unemployment and more layoffs. The truly rich shelter their income in a myriad of ways (as we found watching the antics of the Obama appointees and the Clinton family). Most job creation in the US (and in any modern developed economy) occurs in small businesses who, in the US, file as partership or LLC tax payers. All of these businesses will be facing major tax increases under the Obama budget. They will pull in their horns. Employment levels will fall. Class warfare revenge seldom produces good policy.

Obama's idea for getting people back to work is for the government to hire them and, no doubt, his plan will create many more government jobs. But private jobs will be lost by the millions if this budget is adopted anywhere near his recommendations. If the Obama budget is adopted forget about economic recovery within this generation. This economy will be sunk for many, many years to come.

To be a bull now requires the belief that the Obama budget will not make it through a two-thirds Democratic Congress. Keep your fingers crossed.

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