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Obama’s State of the Union? Tax and spend, here we go

Written By | Jan 19, 2015

WASHINGTON, January 19, 2015 — After six years of raising taxes, increasing spending on social programs, and lackluster economic growth, it would be logical for President Obama to try something different to stimulate the economy. Instead, during Tuesday’s State of the Union speech, the President will talk about more of the same.

In 2008, the federal government spent just under $3 trillion. Spending increased by about 20 percent in Obama’s first year in office, and although Republicans in Congress tried to restrain spending when they took control of the House of Representatives in 2010, spending this year will top $4 trillion.

The Obama administration has raised taxes significantly. Tax increases include an increase in the capital gains and dividend income tax, an increase in the excise tax on tobacco, and a catalog of Obamacare-specific tax increases: the individual mandate tax, the employer mandate tax, the surtax on investment income, the excise tax on comprehensive health insurance plans (starting in 2018), the medicine cabinet tax, an increase in Medicare payroll tax, the flexible spending account cap,  the medical devise tax, a reduction in medical itemized deductions, indoor tanning services tax, elimination of tax deduction for some drug coverages, the Blue Cross/Blue Shield tax hike, the excise tax on charitable hospitals, the tax on innovator drug companies, the tax on health insurers, and the black liquor tax.

What have these tax-and-spend actions done for the U.S. economy?

We have experienced the worst economic recovery in modern history, the elimination of about 6 million adults from the workforce, the largest number of Americans living in poverty, the largest number of Americans receiving food stamps, the growth of income inequality, and continued slow growth.

On Tuesday, President Obama will suggest more of the same. He wants to increase spending on education and says he wants community college to be free to all Americans. American taxpayers already provide at least 12 years of education for every child. Since college professors and administrators will not work for free, Obama means that community college will be paid for by the taxpayers rather than by the students who receive the education. In other words, free means that the taxpayers will have to foot the bill.

The President intends to pay for this program by increasing taxes on the wealthy, noting that the wealthy have “done pretty well” in the last five years. While that is true, it is mostly because the Federal Reserve’s expansive monetary policy. The resulting rock bottom interest rates have caused capital to flow out of debt markets and into equity markets, thereby increasing the demand for stocks and significantly raising stock prices. This, of course, will change once the FED starts to raise interest rates.

The real problem is that raising tax rates may not increase tax revenue.

For instance, Obama wants to raise the tax on capital gains to 28 percent. In 1987, when the capital gains tax was raised from 20 percent to 28 percent, revenue from capital gains fell. From 1987 to 1991, revenue fell from about $34 billion to $28 billion, an average annual decline of almost 13 percent. Conversely when the rate was cut from 28 to 20 percent in 1997, revenue grew by almost 18 percent annually from 1997 to 2000.

Taxing the wealthy because they have “done pretty well” and increasing spending on low income earners because “they need the help” will only serve to slow economic growth, which is exactly opposite to what is needed today.

The President should set economic growth as his number one priority. Growth would essentially solve all of our economic problems. Growth would provide jobs to reduce unemployment, which reduces government spending on income maintenance and social programs, increases tax revenue, tends to reduce income inequality and provides much needed opportunity for all Americans.

Obama’s suggestions, which will not be passed by the current Congress, would lead to slower economic growth. In every instance where he has tried to reduce income inequality by raising taxes on the highest income earners and giving money to the lowest income earners through social programs, income inequality has actually worsened and the economy has experienced slow growth.

It is time for the President to stop his tax-and-spend programs and start working on lower tax and higher growth programs.


Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.