Obama proposes tax increases to pay for jobs/stimulus spending

In his speech to Congress on Sept. 8, President Barack Obama proposed a $447 billion job's package consisting of tax decreases and new federal government stimulus spending.

The largest piece of Obama's proposal is a $240 billion temporary, targeted and timely tax decrease in Social Security taxes for employees and employers of 3.1 percent each for 2012. Employees and employers would pay half of what they normally pay of 6.2 percent each or a total of 12.4 percent up to an income limit which will be $106,800 in 2012.

While this would certainly provide additional income for both workers and businesses to spend, save or invest, it would not directly help the unemployed who are more likely to quickly spend any additional income they receive. While the employed would have additional income, it is not clear whether most individuals would either consume or save this additional income.

In addition, both Social Security and Medicare are running deficits and this temporary tax decrease would make the Social Security deficit even worse for 2012. However, Obama's plan does require that the loss in Social Security payroll tax revenues must be paid for by additional taxes.

Stanford University economist John B. Taylor argues against "temporary, targeted, and timely" fiscal stimulus packages in a Wall Street Journal editorial entitled "Why permanent tax cuts are the best stimulus, short-term fiscal policies fail to promote long-term growth."  Taylor wrote "According to the permanent-income theory of Milton Friedman, or the life-cycle theory of Franco Modigliani, temporary increases in income will not lead to significant increases in consumption. However, if increases are longer-term, as in the case of permanent tax cut, then consumption is increased, and by a significant amount." Two examples of a "temporary, targeted and timely" fiscal stimulus plans are Obama's first stimulus package of $787 billion and his second proposed jobs/stimulus/tax package of $447 billion.

Instead, Taylor argues for permanent, pervasive and predictable tax changes to stimulate the economy and create more jobs. The FairTax is an example of a permanent, pervasive and predictable fiscal stimulus that would dramatically increase the real growth rate of the U.S. gross domestic product and reduce the unemployment rate.

According to the Americans for Fair Taxation website, "The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax  administered primarily by existing state sales tax authorities."

Obama said "pass this bill" several times in his speech. The only problem is there was no proposed bill to pass. Once the proposed legislation makes it to Congress, it would need to be scored by the Congressional Budget Office (CBO) to determine the estimated spending outlays and tax revenue collections by fiscal year over a 10-year time period.

Obama also stated in his speech that the massive jobs/stimulus package would be fully paid for. On Sept. 12, the Obama administration released some crucial details of how the package would be funded, namely by a huge tax increase of $467 billion.

The new tax increases would take effect in 2013 and would collect an estimated $467 billion in additional tax revenues over 10 years.

Obama's budget director, Jack Lew, summarized the tax increases over 10 years including:

• $405 billion from limiting the itemized deductions for charitable contributions and other deductions that can be taken by individuals making over $200,000 a year and families making over $250,000;
• $41 billion from reducing or eliminating tax credits and allowances for oil and gas companies;
• $18 billion from requiring fund managers to pay higher taxes on certain income;
• $3 billion from changing the depreciation of corporate jets from five years to seven years.

The $405 billion tax increase for individuals and families comes from limiting deductions to 28 cents per dollar deducted and exemptions on individuals who earn more than $200,000 per year and families who earn more than $250,000.

The additional federal spending and higher tax bills are not likely to pass in the near future. Therefore, it is likely that not enough jobs would be created between now and the next election in 2012 to reduce the unemployment rate significantly. To just keep up with population growth and new entrants into the labor force, the U.S. economy needs to create a minimum of 100,000 jobs per month. To reduce the unemployment by .1 percent per month an additional 150,000 jobs per month needs to be created.

If Obama's proposed bill were passed in the near future, preliminary estimates are it would create more than 50,000 jobs per month. The U.S. economy is currently creating significantly less than 50,000 jobs per month. As a result, even if the bill were passed, the official unemployment rate would remain at or above 9 percent for 43 months of the Obama administration. This is not the hope and change the American people were expecting from Obama in 2008.