- The Washington Times - Thursday, March 5, 2009

COMMENTARY:

President Obama’s big spending 2010 budget is filled with tax provisions that will stunt economic growth, job creation and new business formation.

It is bad enough that his soak-the-rich tax increases will have a negative impact on ordinary workers, but worst of all, he will raise them while the U.S. economy is still in a recession or in the difficult process of attempting to climb out of one.

Mr. Obama intends to keep all the Bush tax cuts except the two top tax rates that he will let expire at the end of 2010, a year after the White House says the economy will have shrunk by at least 1.2 percent and likely a lot more.

This means that coming out of a deep, recessionary 2009, when the Federal Reserve forecasts unemployment will shoot to 9 percent or more, Mr. Obama will be raising taxes on investors and small businesses - the very people who create jobs.

This will be the bleak result of letting the two top income tax rates rise in January 2011: from 33 percent to 36 percent and from 35 percent to 39.6 percent, or more than 40 percent when state taxes are added). But how does this affect ordinary Americans?

“According to Internal Revenue Service data, half of all business income is taxed at individual rather than corporate tax rates, and about two-thirds of all flow-through business income is earned by small business owners with annual incomes exceeding $200,000,” says economic adviser Cesar Conda. “The bottom line: Up to one-third of all business income is taxed at the two marginal rates Obama wants to raise,” Mr. Conda is telling his business clients.

With the unemployment rate at 7.6 percent, the highest in 16 years, this is no time to raise taxes on small businesses, the engine of job growth in the country. Or even telegraphing that he intends to do this at this end of the year.

“President Obama may propose tax hikes that do not take effect until 2011, but the fact is they already are depressing economic activity in the middle of the recession,” says Alison Acosta Fraser, director of the Heritage Foundation’s Roe Institute for Economic Policy Studies. “Facing higher future taxes, businesses, investors and savers reduce their activities today,” she says in a recent study.

But Mr. Obama’s demands for more tax revenue doesn’t stop there. He wants a 2 percent to 4 percent payroll tax surcharge on taxpayers earning more than $250,000 to boost Social Security surpluses (which the government spends). And he wants to restrict the itemized tax deductions for this same group of taxpayers, which would push their income tax rate up another 7 points.

Mr. Obama’s rosy economic growth projections for next year have raised eyebrows among many economists who think we are in for a period of slow growth coming out of this recession, especially if his draconian tax increases are enacted.

In a cook-the-books effort to boost future revenue numbers to make it look like he will cut the deficit in half, his budget predicts the economy will grow by an astounding 3.2 percent in 2010, followed by an even stronger 4 percent growth in 2011, then 4.6 percent in 2012 and 4.2 percent in 2013.

In reality, the consensus forecast by Blue Chip Economic Indicators last month predicted that the gross domestic product would fall by nearly 2 percent this year, and rise by an anemic 2 percent in 2010, and about 2.9 percent in 2011 and slightly less thereafter.

Economic forecasters foresee the economy rebounding in a U rather than a V shape. “I think this downturn is going to last longer and the rebound will be fairly anemic,” California State economics Professor Sung Won Sohn told the Associated Press.

The sharp fourth-quarter downturn deepened the recessionary outlook for the foreseeable future. Legendary investor Warren Buffet says, “The economy will be in shambles throughout 2009 - and, for that matter, probably well beyond.”

The economy may make a comeback of sorts in 2010, but it probably will be in the recovery stages for some time to come. This means the economy will need all its oars in the water pulling at the same time. That means lower tax rates across the board and postponing any large, costly social programs like health-care reform until the economy is on solid footing.

Even Democrats in Congress complain about Mr. Obama’s budget proposals.

Senate Budget Committee Chairman Kent Conrad, North Dakota Democrat, has been one of the chief complainers. “I am concerned about the long-term buildup of debt,” he said last week. He also doesn’t like some of the president’s tax increases on wealthier Americans such as cutbacks for tax deductions for charitable contributions. “I would put that high on the list of things that will be given a thorough scrubbing and may well not survive.”

So it’s not just Wall Street that has given Mr. Obama’s economic policies a huge vote of no confidence. Democrats have their doubts, too.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.