Obama’s Scary Hoover-Style Tax Hikes

March 2nd, 2009 5:17 PM Eastern

Obama’s Scary Hoover-Style Tax Hikes

By Phil Kerpen
Director of Policy, Americans for Prosperity

The composition of the tax hikes in the 2010 budget is frighteningly similar to the Revenue Act of 1932, the much-maligned Hoover tax hikes that put the “Great” in Great Depression by putting an enormous tax burden on millions of Americans, largely through excise taxes. These taxes, raised even further by FDR, were justified by the promise that the funds would be returned in the form of relief programs, which is to say that some portion of the tax revenue, after administrative costs in Washington, would go back to the states with strings attached, often to further political rather than economic objectives.

As the table below shows, the Obama budget blueprint, like the 1932 act, is split mainly between broad excise taxes and income tax hikes on high income earners. Unfortunately, there were no 10-years projections back then, so I had to use one year numbers, but it’s still an interesting comparison.

Courtesy Phil Kerpen

The 2010 budget assumes, probably correctly, that the only way to generate a big revenue increase in the face of severe economic weakness is to use a tax mechanism–the excise tax–that is collected in relatively small increments across millions of transactions made by Americans of all income levels. That is a direct lesson of 1932, when the income tax on the rich–then the only people who paid income taxes–was raised to capture as much revenue as possible before high-income earners fled the country or stopped working. Then, as now, that amount was about 0.3 percent of GDP.

Excise taxes did most of the revenue work in the 1932 act, including excises on everything from trucks, tires, jewelry, chewing gum, and soft drinks to gasoline and electricity. Those last two are especially interesting in light of the carbon cap-and-trade proposal in the 2010 budget, which is a de facto excise tax on those items as well as every other energy technology that relies on the most affordable energy sources: natural gas, oil, and coal.

Despite President Obama’s promise that “If your family earns less than $250,000 a year, you will not see your taxes increase a single dime. I repeat: not one single dime,” his new budget raises 45 percent of its revenue from energy taxes that will be paid by everyone who fills a gas tank, pays an electric bill, or buys anything that was grown, shipped, or manufactured.

While the overall tax hike is smaller than 1932 (0.9 percent of GDP versus 1.6 percent of GDP) and the excise/energy component is only half the size (0.4 percent of GDP versus 0.8 percent of GDP) there is every reason to believe that the bite of the cap-and-trade tax will increase considerably beyond the initial projections, making this plan even more resemble 1932.

The cap-and-trade provisions are designed to get much, much more expensive over time, making the total impact hard to quantify but likely to be as or more expensive than the 1932 Revenue Act. In fact, Obama’s version of cap-and-trade is much more expensive than last year’s already outrageous Lieberman-Warner bill, mandating emissions cuts of 83 percent versus 63 percent in last year’s version.

I didn’t include the death tax in the chart, because there was no revenue estimate for it in 1932, but that’s another eerie parallel. In 1932 the rate was hiked from 20 percent to 45 percent, and in 2010, under Obama’s proposal (which is hidden in a footnote in the budget) it will go from zero under current law to that same 45 percent rate.

If we continue down a path of repeating the policies of the 1930s we risk a repeat of the same results. Let’s hope Congress has the good sense to say no to these Hoover-style tax hikes.

Phil Kerpen is director of policy for Americans for Prosperity.

U.S. Economy Shrinks At Staggering Pace

2008 Closed With 6.2 Percent Rate Of Decline As Consumers, Businesses Pinch Pennies

WASHINGTON, Feb. 27, 2009

(CBS/AP)  The economy contracted at an incredible 6.2 percent pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession. 

The Commerce Department report released Friday showed the economy sinking much faster than the 3.8 percent annualized drop for the October-December quarter first estimated last month. It also was considerably weaker than the 5.4 percent annualized decline economists expected. 

Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky. 

"Right now we're in the period of maximum recession stress, where the big cuts are being made," said economist Ken Mayland, president of ClearView Economics. 

The new report offered grim proof that the economy's economic tailspin accelerated in the fourth quarter under a slew of negative forces feeding on each other. And it raises doubts about the Obama administration's forecast of only 1.2 percent negative growth this year, reports CBS News correspondent Mark Knoller. 

The economy started off 2008 on feeble footing, picked up a bit of speed in the spring and then contracted at an annualized rate of 0.5 percent in the third quarter. 

The faster downhill slide in the final quarter of last year came as the financial crisis - the worst since the 1930s - intensified. 

Consumers at the end of the year slashed spending by the most in 28 years. They chopped spending on cars, furniture, appliances, clothes and other things. Businesses retrenched sharply, too, dropping the ax on equipment and software, home building and commercial construction. 

Before Friday's report was released, many economists were projecting an annualized drop of 5 percent in the current January-March quarter. However, given the fourth quarter's showing and the dismal state of the jobs market, Mayland believes a decline of closer to 6 percent in the current quarter is possible. 

The nation's unemployment rate is now at 7.6 percent, the highest in more than 16 years. The Federal Reserve expects the jobless rate to rise to close to 9 percent this year, and probably remain above normal levels of around 5 percent into 2011. 

A smaller decline in the economy is expected for the second quarter of this year. But the new GDP figure - like the old one - marked the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through an intense recession. 

American consumers - spooked by vanishing jobs, sinking home values and shrinking investment portfolios have cut back. In turn, companies are slashing production and payrolls. Rising foreclosures are aggravating the already stricken housing market, hard-to-get credit has stymied business investment and is crimping the ability of some consumers to make big-ticket purchases. 

It's creating a self-perpetuating vicious cycle that Washington policymakers are finding hard to break.

To jolt life back into the economy, President Barack Obama recently signed a $787 billion recovery package of increased government spending and tax cuts. The president also unveiled a $75 billion plan to stem home foreclosures and Treasury Secretary Timothy Geithner said as much as $2 trillion could be plowed into the financial system to jump-start lending. 

For all of 2008, the economy grew by just 1.1 percent, weaker than the government initially estimated. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001. 

With Friday's figures, Mayland lowered his forecast for this year to show a deeper contraction of just over 2 percent. 

In the fourth quarter, consumers cut spending at a 4.3 percent pace. That was deeper than the initial 3.5 percent annualized drop and marked the biggest decline since the second quarter of 1980. 

Businesses slashed spending on equipment and software at an annualized pace of 28.8 percent in the final quarter of last year. That also was deeper than first reported and was the worst showing since the first quarter of 1958. 

Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008. 

A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services. 

Businesses also cut investments in inventories - as they scrambled to reduce stocks in the face of dwindling customer demand - another factor contributing to the weaker fourth-quarter reading. 

Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a "severe contraction" and is likely to keep shrinking in the fix six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system. 

Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising. 

That's partly because many analysts don't think the early stages of any recovery will be vigorous, and because companies won't be inclined to ramp up hiring until they feel confident that any economic rebound will have staying power. 

More job losses were announced this week. JPMorgan Chase & Co. on Thursday said it would eliminate about 12,000 jobs as it absorbs the operations of failed savings and loan Washington Mutual Inc. That figure includes 9,200 cuts announced previously and 2,800 jobs expected to be lost through attrition. 

The NFL said Wednesday that the league dropped 169 jobs through buyouts, layoffs and other reductions. Textile maker Milliken & Co. said it would cut 650 jobs at facilities worldwide, while jeweler Zale Corp. said it will close 115 stores and eliminate 245 positions. 

On Monday, troubled flash memory maker Spansion Inc. said it will lay off about 3,000 employees and computer chip maker Micron Technology Inc. announced it will slash as many as 2,000 workers by the end of August. 

© MMIX, CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.

Commentary: Jindal leads GOP on a 'march to folly'

By James Carville

CNN Contributor

Editor's Note: James Carville, a Democratic strategist who serves as a political contributor for CNN, was the Clinton-Gore campaign manager in 1992 and political adviser to President Clinton. He is active in Democratic politics and a party fundraiser.

James Carville says the Republicans who oppose expanded jobless benefits are on a "march to folly."

James Carville says the Republicans who oppose expanded jobless benefits are on a "march to folly."

(CNN) -- Over the course of history, governments, political regimes and leaders have done some stupid things despite all arguments to the contrary, at times even against their own self-interest.

Pulitzer Prize-winning author Barbara Tuchman (best known for "The Guns of August") chronicled this in "The March of Folly," examining the Trojan War, the provocation by the Renaissance Popes that led to the Protestant secession, the unnecessary loss of American colonies by Britain and the now well-documented United States loss in Vietnam.

Fast forward to 2009. The Republican Party has just suffered a bad but not unprecedented defeat. The U.S. economy is in shambles. And the patch of ground some leading figures in the GOP have chosen to occupy to rally back is to oppose expanded unemployment benefits in the middle of a recession.

They could have chosen a stronger national defense and terrorism policy, personal responsibility or even market-based health care reform. Arguing that President Obama's publicly-supported economic stimulus bill was full of wasteful spending (Rush Limbaugh termed it "Porkulus") was not enough.

No, their cause in this time of crisis is to deny expanded unemployment benefits to tens of thousands of jobless workers by saying they would not accept added federal funding for them.

So my home state governor, creationism-toting Bobby Jindal, the newly-tapped spokesperson of the Rush Limbaugh-led Republican Party, and a handful of Southern governors, took their stand on expanded unemployment benefits which make up about 2 percent of the economic recovery package.

This, despite the fact that economists from all political ideologies concluded that extending the length of time that workers can collect unemployment insurance benefits would be one of the most effective stimulus measures.

A 2008 Congressional Budget Office memo stated that it would be an effective measure for Congress to pass because "it seems likely that recipients would spend most of those benefits."

Mark Zandi, former economic adviser to Sen. John McCain's campaign, estimates that for every $1 invested in unemployment benefits assistance, $1.64 in economic activity is generated.

Gov. Jindal is being joined in this folly by Mississippi Gov. Haley Barbour and South Carolina Gov. Mark Sanford, whose states have high jobless rates and could use the most economic assistance.

Worse, the right's new hero is CNBC's Rick Santelli, a man who on September 2, 2008, said the economy was healthy and blamed the business media for the financial crisis.

He has taken a similarly small, eroding patch of ground to mount a charge against the government's recovery package by suggesting that the government should let more homes needlessly fall into foreclosure.

In his latest tirade, Santelli comments the government is "promoting bad behavior" and that it's going to "subsidize the losers' mortgages." Well Mr. Santelli, President Obama's home affordability plan will help stave off even more foreclosures and allow those who are barely staying afloat to refinance their mortgages, both of which are in the best interest of the American economy as each foreclosed home reduces nearby property values by as much as 9 percent.

This is the same guy who recently said that the all-white, all-male stock traders next to him represented "a pretty good statistical cross-section of America. The silent majority." This from a former derivatives trader -- a patriotic profession up there with the likes of soldiers, teachers and farmers. Like what America needs now is advice from a derivatives trader.

Today's Republican Party, the lowest-held political party in the history of modern polling, should be in agony. They have just committed a serious blunder, a folly have you.

If the great Mrs. Tuchman were still alive, she'd surely call this latest Republican gambit the Cap Pistols of February.

The opinions expressed in this commentary are solely those of James Carville.