The Obama Tax and Spend Hikes

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According to the Wall Street Journal/NBC News poll released today, only 26% of voters think the economy is going to be better in the next year, and 61% think the country is on the wrong track. Desperate to show Americans he’s fighting “every single day, every single hour, every single minute” to turn the economy around, President Barack Obama unveiled yet another economic stimulus spending plan yesterday. This time the President is promising to spend $50 billion over six-years on a “Race to the Top”-style transportation pork plan that will fund pet leftist projects like high-speed rail. The President promised: “this will not only create jobs immediately, it’s also going to make our economy hum over the long haul.”

But even the President’s own officials aren’t believing the hype. Politico reports: “Under the best-case scenario, however, jobs would be created in 2011, the official said. ‘This is not an … immediate jobs plan. This is a six-year reauthorization that’s front-loaded,’ according to the senior administration official.” This Obama aide is half right: the President’s infrastructure plan will not create any jobs any time soon. As we have thoroughly documented before environmental regulations like the National Environmental Protection Act (NEPA) make it impossible for infrastructure spending to be implemented quickly. And even in the long run, as Heritage Foundation economist Ronald Utt has documented, the vast majority of independent academic and federal government studies show that the relationship between infrastructure spending and eco­nomic activity is close to zero.

But spending is just one side of President Obama’s economic prescription for the country. Not only is he advocating another $50 billion in spending on top of the $814 billion in economic stimulus spending he has wasted so far, he is also advocating for a $921 billion tax hike set to take effect this January 1, 2011. The administration wants us to believe that this massive tax hike will have no effect on our economic recovery. But that is just not so. Raising taxes on work and investment would mean less work and less investment and can be regarded only as an overtly hostile anti-jobs policy. That is just one of the myths exposed by Heritage analyst JD Fosters’ new paper: Obama Tax Hikes Defended by Myths and Straw Man Arguments. Foster also details:

Myth: Small businesses would be only marginally impacted by higher taxes rates.
Fact: Successful, growing, hiring small businesses are especially targeted by higher tax rates. Many Americans report business income from hobbies, sideline businesses, etc., thus inflating the number of so-called “small businesses.” True small businesses have employees and machinery, offer goods and services widely, and are far fewer in number. Yet they earn most of the small business income that would be subject to the higher rates.

  • Myth: Tax rates matter little in the long run.
    Tax rates have their most powerful effects on long-run growth and wages. The effects of tax changes take time to manifest fully because major business investments typically require extended evaluation, planning, and implementation. Similarly, while workers respond quickly to changes in tax rates, a full response takes time as they adjust their spending and budgets accordingly.
  • Myth: The country cannot afford not to raise taxes.
    The problem is spending, not revenues. The country cannot afford to let current spending levels continue. Taxes as a share of the economy will soon exceed the historical average. The current and projected unsustainable deficits are due to Obama’s spending surge, not a shortage of revenue.

Our economy is not on the wrong track because we spent too little. According to Keynesian theory, a $1.4 trillion budget deficit should have already stimulated our economy into full recovery. Our economy is struggling because of uncertainty caused by the tax and spend policies in Washington. The President’s $921 billion tax hike is not helping matters. A sound, responsible budget policy absent tax hikes does not demand radically lower levels of spending but only reversing Obama’s radical spending. Congress should make current tax policy permanent and then get about the business of paring government spending to sustainable levels.

The Heritage Foundation is public policy research institute promoting conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.