The Heritage Foundation, a D.C.-based policy institute, has released a scathing report on the prospect of income tax increases for the coming year. The authors contend that while high income households may be targeted, everyone will pay the price through lower economic growth and fewer employment opportunities. In the case of Louisiana, they project that the approximately $5 billion increase in total tax revenue over the next ten years would cost the state an average of over 9,000 lost jobs each year for the next decade.

The tax increases would come about by letting some of the 2001 and 2003 tax cuts expire, which President Barack Obama has already publicly called for. Additionally, the “death tax” is set to re-emerge at a rate of 55 percent, with a $1 million exemption. According to the White House, these increases would be assigned to the “wealthiest two percent of families” – those households or businesses earning more than $250,000 per year – as part of a “comprehensive tax policy plan.”

Concurrently lower income earners may receive tax cuts, depending how congress proceeds, along with changes to available deductions. Obama is promoting this approach “to ensure we are restoring fairness and returning to fiscal responsibility.” According to Obama’s website, his “tax plan will help restore bottom-up economic growth that helps create good jobs in America and empowers all families achieve [sic] the American dream.”

The Heritage Foundation economists, however, contend that the “steep tax hikes” on businesses and households earning more than $250,000 per year will lead to “substantial job losses” for those earning less; “no income earner will be unscathed.” They point out that these taxes target investment, “one of the main drivers of economic growth and hence jobs and wages.”

The report’s authors used a method of analysis developed by IHS Global Insight, the World’s largest economic forecasting company. They then calibrated the model to American data and compared the retention of all current tax rates through to 2020 with the tax changes proposed by the Obama administration.

On the national level, with the tax proposal they found almost 700,000 fewer jobs each year for the next ten years and a $1.1 trillion total decline in the economy’s production.* For Louisiana, their breakdown places the job loss at an average of 9,244 jobs per year, peaking at 11,676 in 2016, and an average of $3,125 less disposable personal income per household. (See below for diagram.)

Karen Campbell, one of the study’s authors and a macroeconomic specialist, says “Every income class is going to be hit in some way. We live in an economy where markets tie us all together… So there is no way to affect just one part of the economy or one group in the economy.”

She also believes the federal government would deprive itself of greater revenues by stifling taxable economic activity.

“When you raise taxes on this one group, you’re going to actually slow down not just the amount of taxable income they could have generated but taxable income that every class could have generated. So you’re going to see lower payroll taxes and a lower tax base in general.”

The White House anticipates increased tax collection of $70 billion, on average over the next ten years, but based on “static” economic projections that don’t account for reduced economic activity. Her analysis points to only $26 billion, and “for that $26 billion, what we’re giving up is very high in terms of jobs.” (Click below to hear a nine minute interview with Karen Campbell, or here to open in a new tab.)

On the other hand, last week the director of the Congressional Budget Office, Doug Elmendorf testified that the size of government borrowing, without tax increases, is set to impede private investment and that too would reduce economic activity.

“Those effects are largely the net result of two competing forces… Lower tax revenues increase budget deficits and thereby government borrowing, which reduces economic growth by crowding out investment. At the same time, lower tax rates boost growth by increasing people’s saving and work effort.”

The report’s authors acknowledge the severity of the current fiscal situation, but one of their subtitles explains, “It’s the Spending, Stupid.”

“Our deficits are not caused by a lack of government revenue from hard working taxpayers. Our deficits are caused by out-of-control Washington spending. Even if Obama and Congress do hike taxes, does anyone expect Congress to not spend any additional revenue?”

These economists, along with the Tax Foundation, a D.C.-based non-partisan tax research organization, also dispute the accuracy of the widely promoted $250,000 figure. To demonstrate the currently proposed tax plan’s many potential tax increases for lower income earners, the Tax Foundation has set up an online tax calculator.

Given the pressure of the upcoming congressional elections and the lack of a clear majority on the issue, Democrat leaders have delayed a vote on the Obama tax proposal until after November 2nd. However, with tax provisions set to expire automatically, they have confirmed their intent to bring the measure back before Congress before the end of the year.

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy. He can be contacted at fhodgson@pelicaninstitute.org, and one can follow him on twitter.

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Barack Obama proclaimed March 7^th-March 13^th to be the National Consumer Protection Week. Supporting the creation of an independent Consumer Financial Protection Agency, Obama said:

“[…] our Government must do more to stand up for consumers. From excessive bank account overdraft fees to abusive mortgage lending practices, our broken financial system produces profits at the expense of American families.”

Do we really need the government to “do more” considering that it plans to do more of what helped create the current financial crisis?

Mark Calabria of the Cato Institute believes that “as designed, it [i.e. the Consumer Protection Agency] would increase the likelihood of future crises rather than reduce them.” Arguing that the intention is to expand government reach over non-banks financial products, Calabria calls for a repeal of government efforts to push risky lending and easy credit.

At a recent Loyola Economics Club meeting, Dr. George Selgin pointed out that we spend considerable time deciding which technology to buy, but when it comes to choosing a bank for our savings we often look only at the interest rate. As uninformed depositors, consumers unwittingly contributed to the current financial crisis.

Consumer indifference in the area of banks is encouraged by the overly protective safety net of insured deposits guaranteed by the government. As editor of RealClearMarkets John Tammy explains, “because our savings are over-insured, we don’t stop to consider the activities or the health of the institutions we bank with.”

Tammy believes that if the FDIC were to be abolished, the private sector would have the incentive to step in and insure deposits; a private form of insurer would emerge. It is likely that markets would provide greater and more effective oversight of the activities of insured banks, leading to more careful investing from consumers. Tammy continues:

“If savers were faced with the possibility of losing their savings altogether, it’s near certain that just as they diversify their stock holdings as a form of wealth protection, so would they diversify their bank deposits.”

The over-insured depositor is a moral hazard to our economy. The current administration has to realize that consumer protection does not necessarily improve the US financial system. It is time to revisit the federal deposit insurance program and introduce reforms that will allow free markets to incentivize responsible behavior.

Chris Edwards of the Cato Institute highlights the level of government intervention by examining the various forms of federal aid to the states. As he writes in Downsizing the Federal Government:

“There are more than 800 state and local aid programs, based on my count of programs in the Catalog of Federal Domestic Assistance. They range from the giant $225 billion Medicaid to hundreds of programs that most taxpayers have probably never heard of, such as a $15 million program for Nursing Workforce Diversity, a $120 million program for “Boating Safety Financial Assistance,” and a $150 million program for Healthy Marriages.”

President Obama recently announced several aid programs for Louisiana. As described in the President’s FY2011 Budget, these programs provide “lower taxes, better teachers and classrooms, and important investments in our roads, highways, and airports.” Louisiana will receive:

• Tax cuts for 1.6 million families
• $1 billion for schools, students, and teachers
• $895.8 million to fix and expand the state’s network of roads and highways, modernize airports, and expand water and sewer infrastructure
• $543 million in new funding for Pell Grants to help families pay for college
• $518.6 million for housing assistance

With the current federal deficit at $12 trillion and expected to increase, is this federal aid really appropriate? Edwards provides a number of reasons to believe that this kind of spending does not make sense:

• Grants spur wasteful spending and bureaucracy
• Aid allocation is haphazard
• Federal aid reduces state policy diversity
• Grants cause policymaking overload and make government responsibilities unclear
• Common problems are not necessarily national priorities

Our Constitution provides for a system of federalism, which lets states identify and address their own priorities. This system encourages creativity among the states and helps prevent the concentration of too much power in Washington. Unfortunately, federalism has taken a beating and states are now in the habit of looking to Washington first.

Congress could encourage more federalism by cutting federal grants-in-aid. More power would consequently be returned to states and the private sector and unnecessary federal spending would be minimized.

As Diana Furchtgott-Roth of the Manhattan Institute points out, there is widespread hostility towards the financial sector even though:

• 140 banks failed in 2009
• regulators and Congress encouraged banks to make high-risk loans
• many banks were required by Hank Paulson to take the TARP money in 2008
• all but one large bank repaid TARP funds with interest

In order to regulate banks, President Obama is adopting both the Volcker Rule and the Financial Crisis Responsibility Fee. However, the consequences of having both regulations simultaneously interfering with the financial industry are highly uncertain.

Jason Zweig believes that the Volcker rule would distort banks’ behavior. But Diana Furchtgott-Roth argues that it “would restrict banks to core customer-based activity, strengthening the banking system.”

Obama’s proposed bank fee, which is actually a tax, could discourage intra-bank lending, hinder the banking system, and reduce the supply of credit available to customers. The likely effects of the after-TARP fee may undermine Obama’s plan to expand lending programs for small businesses.

Will the after-TARP tax along with the Volcker Rule effectively stabilize the banking system? It doesn’t seem likely. Reform is necessary, but the recovery will not be advanced by taxing institutions that play a key role in generating economic growth.

President Obama has announced his 2011 budget proposal. When FY 2010 ends on September 30 the deficit will total to $1.6 trillion, much higher than the Congressional Budget Office’s forecast.

The Bush tax cuts will expire at the end of this year and if Obama extends their term, the federal deficit estimates will be even higher. Brian Reidl estimates the national debt to count for 98 percent of the GDP by FY 2020, higher than last week CBO’s forecast of 67 percent.

Next year’s budget totals $3.83 trillion, and the Obama administration describes it as “a budget that helps middle class families.” Chris Edwards explains that the 2011 budget will be “$1.1 trillion more than the federal budget nine years ago had promised. That’s a 41 percent forecasting error.” Will this kind of forecasting error keep happening?

The government has become too big and taken too many actions beyond its core responsibilities. To effectively control spending, legislative changes to current budget rules will need to be made.

One useful step would be for the federal government to give states more freedom to find innovative and cost-effective ways to solve problems. One of the “laboratories of democracy” could certainly come up with something better than our existing Medicaid program, for example. So if there is a silver lining in the projected deficits, it is that dramatic reform may be inevitable.

As of January 22, the current public debt totals more than $12.3 trillion. The Congressional Budget Office reports that if current laws and government spending remain the same, the budget for FY 2010 is estimated at more than $1.3 trillion.

During the Middle Class Task Force meeting, Vice President Biden and President Obama announced new tax cuts to help American middle class families. The following day, Obama proposed a freeze on spending.

Tax cuts generally increase consumer spending. This year American families will most likely use additional savings to pay off their debts. This also happened following last year’s economic stimulus.

A freeze in government spending would help reduce the federal deficit. However, the announced budget freeze accounts for only 17% of the budget, leaving out large sectors with increasing costs (Medicare, Medicaid, military spending, and homeland security.)

The rate of future economic growth looks increasingly uncertain. New laws reducing government revenues and increasing government spending could still increase the federal budget deficit. By 2020 the federal debt could reach 67% of the GDP, the highest level since the 1950s.

Where do we go from here? There are no easy answers. For a look at some of the options, take a look at the CBO’s suggestions for decreasing the federal deficit.

The Cato Institute offers interesting commentary on Obama’s State Of The Union speech. Cato Editors provide useful information on tax cuts, the stimulus bill, the budget freeze, and job creation.

Read the State Of The Union Fact Check for information on some of the major statements made during Wednesday’s address to Congress.

“If these folks want a fight, it’s a fight I’m ready to have,” said President Obama as he emphasized his campaign against Wall Street. Following up on the after-TARP tax, Obama is introducing the Volker Rule to impose tougher regulations on the financial sector.

The Volcker rule will cap the size and scope of banks, limiting their trading abilities and risk taking. Banks insured by the FDIC will have to give up proprietary trading and their hedge funds. But WSJ columnist Jason Zweig explains that the Volcker Rule could distort behavior, as smaller banks become more aggressive and larger banks get “lazier and less disciplined.”

Regarding Obama’s claim that “never again will the American taxpayer be held hostage by a bank that is ‘too big to fail’,” Nicole Gelinas points out that the big financial institutions bailed out in 2008 were not insured by FDIC. Despite the new rule, recent events suggest that the government will continue bailing out troubled institutions in the future.

New regulations should seek to improve the incentives and information available in the financial markets. Financial reform is necessary, but the recovery will not be advanced by punishing institutions that play a key role in generating economic growth. The DJIA dropped 213.27 points after Obama’s proposal, an indication that investors do not want to see Wall Street treated like an enemy by the government.

Since September 2008 executive bonuses have been criticized as excessive, unfair, and unnecessary. Case in point: Last week in a public speech President Obama referred to executive bonuses as being “obscene.”

Are executive bonuses really a problem? Or just a way for politicians to gain public approval?

Consider the traditional return on investment model: the higher the risk, the higher the return. This also applies to job compensation: the higher the risk (i.e. responsibility), the higher the return (i.e. income and bonuses). It follows that an executive’s income and bonus reflects the high level of responsibility and commitment to the company required at the senior management level.

Xavier Gabaix and Augustin Landier, economics professors at New York University’s Stern School of Business, investigated the increase in the American CEO pay since 1980 and found that executives are not overpaid as most people on Capitol Hill think:

[…] the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. (Asset values have increased sixfold because both corporate earnings and the price-to-earnings ratio investors are willing to tolerate have increased by factors of 2.5.) The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.

In a free market society, executives that bring value are rewarded handsomely, while those who do not bring value are replaced. But when government tampers with market forces, efficient levels of incomes and bonuses are skewed. The result is an economy that is misguided by fabricated, artificial signals.

In fact, the Financial Crisis Responsibility Tax may ultimately have a negative impact on the taxpayers that put up the money in the first place.

The Obama Administration believes that beneficiaries of the $700 billion Troubled Asset Relief Program (TARP) should start paying back the debt. To facilitate this, Obama’s plan will put in place a tax on banks having more than $50 billion in assets (property owned by the bank).

But if the tax really applies to the beneficiaries of TARP, wouldn’t this include automakers? In fact, banks and large insurance companies will be the only ones targeted by the after-TARP tax, leaving out General Motors and Chrysler. Once again the automakers fall under the category of “too big to fail.”

Further, the after-TARP tax would hit banks that already paid off their debt and insurance companies that did not accept bailout funds.

The after-TARP tax has the characteristics of a punitive tax with its main target being the US banking institutions. While the public is justifiably angry with financial entities that made reckless decisions but were spared the consequences, a tax that hinders the banks’ economic growth and diminishes their ability to lend money does the taxpayers more harm than good.