The Obama Tax and Spend Nightmare

If we should be so unlucky after Inauguration Day, a President Obama will sign into law--with a compliant Congress--the most spectacular series of tax increases in memory (marketed as "tax cuts"). He will do this in the midst of a deep recession and he will do this with unemployment creeping upwards weekly.

The plan is so alarming that 100 tax professors have signed onto a letter agreeing that it would be disastrous in the short and long-term:

We are equally concerned with his proposals to increase tax rates on labor income and investment. His dividend and capital gains tax increases would reduce investment and cut into the savings of millions of Americans. His proposals to increase income and payroll tax rates would discourage the formation and expansion of small businesses and reduce employment and take-home pay, as would his mandates on firms to provide expensive health insurance.

After hearing such economic criticism of his proposals, Barack Obama has apparently suggested to some people that he might postpone his tax increases, perhaps to 2010. But it is a mistake to think that postponing such tax increases would prevent their harmful effect on the economy today. The prospect of such tax rate increases in 2010 is already a drag on the economy. Businesses considering whether to hire workers today and expand their operations have time horizons longer than a year or two, so the prospect of higher taxes starting in 2009 or 2010 reduces hiring and investment in 2008.

It's a plan that would lead to further economic disaster. When five Nobel Prize winners in economics agree (but not including the newest member of that club) it must be one hell of a scary tax plan.

It's a double-whammy for sure. By forcing employers to pay for health insurance, those employers will opt to not hire new employees. It will also hurt those who can least afford it--low income wage earners. If an employer is looking for a mid-level manager for, say, $80,000 per annum, he's not going to sweat the insurance as much and offer the guy $75,000 instead to cut the cost. But a small business employer doesn't have that luxury so will just go without or pay another employee to work the overtime instead.

On top of that, the average worker will pay more in taxes without seeing any reciprocity in benefits. People are struggling and to take even more of their income would be a burden they couldn't handle. Unions will be forced to fight for higher pay raises to offset the loss in taxes while appeasing their members and companies will be forced to either play hardball when negotiating contracts, downsize or raise prices for consumers. A lose-lose any way you look at it.

We may be on the cusp of the biggest redistribution of wealth from the middle and top classes to the bottom we've ever seen.