Obama Plans to Raise Taxes on the Rich and Businesses

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Got money?

You might find it hard to hold onto. Americans with money are caught in a vise. On the one side is the de-leveraging economy. On the other is the government.

The depression squeezes everything – asset prices, businesses, earnings. And it’s going to be with us for years – no matter what the papers tell you. Get ready for a 20% decline in stock prices, says our old friend Marc Faber. Another analyst puts the current P/E at 22…also implying a loss of about 20% just to get down to ‘normal’ levels.

But “this isn’t a normal environment,” says a senior analyst at Ned Davis Research.

Well, it’s normal – for a depression. When word gets around, you’ll see stocks lose ground. Housing will probably go down in price too.

Meanwhile, over on the other side of the vise, Mr. Obama says he wants to raise taxes on the rich and on businesses by $1.9 trillion. Let’s see. We’ll make some guesstimates. There are about 100 million families in the US. Of those, about half are net taxpayers. And the top 10% are said to own half the wealth in the US and already pay 66% of its total taxes. Looks like they’re going to get whacked again. Each of the ‘rich’ families will pay nearly $200,000 more in taxes.

The idea is to make the tax system more ‘balanced,’ says the president, by taking more money from the people who pay the lion’s share of US taxes…and giving it to people who don’t pay anything.

Here’s a comment from Chris Edwards of the Cato Institute:

“President Obama has introduced his budget for next year. He proposes that the government spend $3.83 trillion in fiscal 2011. To put that number into context, let’s take a trip down memory lane.

“Pres. George W. Bush…came into office when annual federal spending was $1.86 trillion. He proposed to increase spending at a healthy clip, rising to $2.71 trillion by 2011.

“Bush and his team started blowing their budget almost immediately. They kept spending more and more – wars, a giant new homeland-security bureaucracy, a big-government response to Katrina, the prescription- drug bill, doubling K-12 education spending, big pay raises for federal workers, financial bailouts, and so on. I can’t think of a single crisis that occurred on President Bush’s watch that the Bush-Rove team didn’t have an interventionist and big-spending response to.

“In Bush’s last year, FY2009, the government spent $1 trillion more than the Bush-Rove team had originally planned. It is true that 2009 spending included $112 billion for the Obama stimulus bill, so let’s take that out. With that adjustment, the Bush-Rove team ended up spending $916 billion more annually by 2009 than they had originally planned. Note that the wars in Iraq and Afghanistan cost only about one-fifth of that 2009 excess spending amount.

“Then Obama comes into office and turns out to be Bush on steroids with respect to federal spending. Obama is calling for spending $3.83 trillion in 2011, or $1.1 trillion more than the federal budget nine years ago had promised. That’s a 41 percent forecasting error.

“The lesson from all this is that an administration’s promised spending beyond the first year is meaningless. Obama is proposing a freeze on a very small part of the budget, for example, but his budget plan next year will likely find reasons to break that promise. It scares the hell out of me that federal spending down the road could be 41 percent higher than even the huge increases projected by Obama…”

We understand the larceny of the tax increases. What we don’t understand is the economics.

The idea of a $3.8 trillion budget is to stimulate the economy. The Obama team knows as well as we do that this ‘recovery’ is mostly a mirage. Without jobs…and housing…you can’t expect real growth.

Monetary stimulus has failed. Mr. Bernanke supplies the banks with all the free money they want. All they do with it is pay themselves bonuses. What more can Bernanke do? Rates are already at zero; they can’t go lower.

That leaves fiscal stimulus. “Spend more money!” That’s what economists such as Nobel prize winner Paul Krugman, The Financial Times’ lead economist Martin Wolf, and Japan expert Richard Koo are whispering in Obama’s ear. Spending supposedly boosts sales and creates jobs.

But if you’re just taking money from one pocket and putting it another, what’s the point? There is no net increase in spending power. Still, economists argue that the rich don’t spend their money; they save it! And we know what an awful thing saving is…

Taking money from ‘the rich’ actually retards a real economic renaissance. The rich are the ones who consume the most…because they have the most to spend. More importantly, they’re the ones who fund the small businesses that do the hiring. Banks won’t take a chance. It’s the relatives…and ‘the rich’ themselves…who put their money on the line.

Either someone forgot to explain this to the Obama administration or they just don’t care. In Washington, politics trumps economics every time…

And now, both politics and economics are putting pressure on Americans with money…

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

Latest posts by Bill Bonner (see all)

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Comments

  1. I have read that when a country tries to tax the wealthy, the wealthy simply move their money out of the country with the click of a mouse. And if the government still try to take it off them, then they move themselves to another country too. They move themselves and their money to another place where they are both respected more. Then the poor and middle class that are left end up paying even more tax than they used to, because now all the rich people have left. Just look at what happened in France- the government tried to tax the rich more, and all the rich people left France, taking their money with them, and went to Belgium to live, and now the government is trying to lure them all back, but interviews results with the lots of rich people show that most of them are happily settled in Belgium and don’t want to uproot again and leave.

    Reply
  2. History shows that when kings have tried to lure foreign wealth and finance into their kingdoms, a short lived period of prosperity follows, followed by bankruptcy and ruin. Better off without them.

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  3. It’s interesting that Bill brings up the higher taxes proposal as it reminds me of where those tax cuts came from to begin with: the so called “Bush Tax Cuts”.

    These tax cuts for the wealthy, both on income and capital gains did two significant things: first they raised the deficit to epic proportions and they created an investment frenzy on wall street.

    With all this extra cash, the rich were trying to work out new ways to invest, leading to all these crazy financial instruments that eventually became Wall Street’s undoing. Meanwhile the poor only became poorer throughout this period and found it harder and harder to pay their mortgages, mortgages given to them courtesy of the rich. We all know what happened next: catastrophe!

    This is the irony I just can’t seem to reconcile. While we may not like taxes or increased government meddling, I think there is a strong case that we could have avoided the recession if tax cuts were given to the poor instead. As a result the rich would have less incentive to go crazy on Wall Street.

    It’s also interesting that Bill suggest that the rich are the people who ultimately invest in small business and drive economic growth. We can all see that over the last few years they chose risky investments instead. What non-government incentives can one make to gently nudge the rich towards making better investments, maybe not for themselves but for the economy as a whole?

    Something to consider, and would be interesting in hearing Bill’s thoughts on this (if he reads these comments).

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  4. Obama’s budget is impossible. China will not give us the money to borrow and spend, which means the Treasury will have to print it. But the Treasury cannot print money any faster then they already are without the public discovering how much money they have been printing for years – which will create a panic, leading to a sinking dollar and massive inflation.

    Obama’s budget is impossible. Congress will be forced to reject it.

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  5. in fact at this recession time,what we can do is not ajust the police to encourage the tax from here to there,that is really from one pocket to another.encourage more rich invest small industry is a good eay way.and all the americans should have frugal idea!!!not spend too much at sth unnecessary!at this time our pocket is empty,any stimulus plan is vain.we we can do is only make more saving and don;t waste too much to make up the deficit!

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  6. We need the rich as Bill Bonner says. Mum and Dad investors don’t have the money to fund things such as independent films, new technologies, even some charity work. And the influence of the rich keep the politicians slightly on their toes. Then again, they can also distort the economy too.

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  7. “I think there is a strong case that we could have avoided the recession if tax cuts were given to the poor instead.”

    The “poor” in America don’t pay taxes – they have no stake in the system. What are you going to do increse the ‘earned income credit’ even more?

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  8. Some can make a convincing argument; Others can make money.
    The majority can do neither.

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  9. I question your assertion that the rich pay the bulk of taxes. Money equals power. And of course the rich use that power to make sure that the society is structured to serve their interests. And that means minimal taxes for them. Has it not always been that way throughout history? What did the (slightly wealthy and probably not stupid) Warren buffet say about tax for the rich back in ’07?
    http://www.timesonline.co.uk/tol/money/tax/article1996735.ece
    “Speaking at a $4,600-a-seat fundraiser in New York for Senator Hillary Clinton, Mr Buffett, who is worth an estimated $52 billion (£26 billion), said: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

    Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent. Mr Buffett told his audience, which included John Mack, the chairman of Morgan Stanley, and Alan Patricof, the founder of the US branch of Apax Partners, that US government policy had accentuated a disparity of wealth that hurt the economy by stifling opportunity and motivation.
    Mr Bonner, this seems to directly contradict what you say. But as it was a fundraiser for Hillary, maybe you could write off Warren Buffet as a liar, and/or part of the one world government, or something.
    You D.R. mob seem often to espouse some woollie variant of christianity. But didn’t your messiah repeatedly warn against the perils of money and wealth?
    You talk about the dangers for society etc, but all I feel you REALLY care about is how the select individual can get rich and stay rich.

    mark ofaquestion
    February 9, 2010
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  10. Hey Mark! to append your comments we might also point to Greece where I believe I heard that only 15000 people are said (to the taxman) to earn more than 100,000 Euro. So you see there, and in many other failed states, you have crony capitalism and crony socialism and the feudal elite live comfortably in both worlds.

    Mr Bonner does lapse into his WASPish feudalist world at times … be it up country in Argentina (another basket case bred of the elite farmer and crony politico), or in the subsidy grabbing and protectionist ridden farmlands in France. Next we’ll hear is that he will be back east but in the Hamptons rather than his WWII address. But we should remind him of the Carolingian pact that kicked off the feudal era & formalised the secular taxman’s powers. Such that he often did a nastier brand of compliance enforcement despite the Christian church’s supposed temperament.

    But at least Mr Bonner doesn’t lapse into militarism and that should be front and centre of our attention right now with him living in a broke state surrounded by more unemployed candidate grunts with kit that goes boom better than ever.

    We need Mr Jefferson back but all we have on ice is Michael Jackson and Ronald Reagan!

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  11. Mark, by your article warren contributed over $8million to the US public coffers, his secretary contributed $18,000.

    While i understand what you are saying about percentages, look at total personal contribution. While i agree warren buffet would have consumed more of the public good over that period (more use of roads etc) i doubt he would have consumed 444 times more.

    Berkshire pays its own massive taxes as well. taxes really should be regressive. each person consumes roughly the same amount of public assets (the poor probably more so) but once a person has contributed for themselves, their families, their families friends, the kids across the park and basically a small suburb, then their tax rate should start to diminish just a little…

    i heard somewhere recently that 16 of new york’s richest families pay something like 60% of the cities taxes. thats an approximation but it was something like that. the rich contribute far more than their fair share, although the percentage rate may diminish.

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  12. Matto
    Warren Buffet said he paid that tax without trying to evade higher taxes.
    The tax system is set up so that the rich have many and varied ways of paying little tax. Tax is optional for the rich. The richer you are the better tax evader(accountant) you can afford, etc.
    The wealthy get the use of the majority of government funding. For example, the arts budget. Have a look at wealthy schools, just how much government funding they actually get. How health funding is diverted into the private sector whilst public hospitals are run down. National Parks – how many poor people (apart from middle class students) you meet trekking Cradle Mountain or wherever? And then work through a governments departments and have a look at who really gets the cash or the use from it?
    Why would the rich and powerful allow it to be structured in any other way ?
    This may be a good site for some interesting analysis and predictions of economic trends.
    But you can’t really expect there to be any sustainable ideas for human society to come from here. Way too much greed and love of individual wealth, blinkering the thinking, and clouding the heart.

    mark ofaquestion
    February 10, 2010
    Reply
  13. Gentlemen, we can rebuild him. We have the technology …

    http:// http://www.smh.com.au/national/many-unhappy-returns-tax-office-faces-backlog-20100214-nzkv.html

    Maybe? :)

    Bloody typical – We get a new computer program for our tax office and the Chinese get a new train:

    http:// http://www.smh.com.au/world/chinas-highspeed-train-breaks-record-20100214-nzes.html

    :) :) :)

    – With the usual “broken” links to shutup DRA’s comment “moderation” system –

    Reply

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