ObamaNomics: Exploitation, Hype & Deceit (2)

In a March 9 Wall Street Journal Guest Editorial,  Obama Economic Adviser Laura D’Andrea Tyson attempted to overcome growing opposition to ObamaNomics, with several deceptions.  This is the second in a series of posts exposing those deceptions.  Click on the ObamaNomics logo to see the first.ObamaNomics assault-on-liberty

President Bush’s tax cuts are scheduled to expire at the end of  2010. At that time, assuming the economy has entered a recovery, President Obama’s budget will restore the top two marginal income tax rates to their 1990s levels of 36% and 39.6% for individuals earning more than $200,000 and couples earning more than $250,000. These changes will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade.

She hopes the reader’s response will be envy as he imagines these top 3%  indulging in extravagant luxuries while the rest of us  tighten our belts and/or fear losing everything.  Our reaction is supposed to be, “So what if they buy only 10 diamond baubles instead of 12?”  This emotional response ignores the real costs that will be born by others in the economy, especially those who have lost or may lose their jobs.

Ms. Tyson then tries to head off the valid criticism that small businesses will be forced to curtail expansion plans and job creation when they are hit with tax increases:

Critics charge that President Obama’s tax rates for high-income earners will strangle small business and stifle economic growth. Such claims are misguided or disingenuous. A full 97% of small businesses will see their rates unchanged or enjoy additional tax benefits under the Obama plan.

Ms. Tyson apparently hopes we’ll assume this means 97% of small business job creation will  be unaffected by the tax increase.

Ms. Tyson exaggerates the fraction of small businesses earning less than $200,000.  IRS data show about 94%. But what’s most important is this statistic is irrelevant to the tax increase debate.

Ms. Tyson generates this deceptive statistic by herding every taxpayer who completes the IRS forms for reporting non-wage income from a business activity into a single category she calls “small business.”   This category of taxpayer includes millions who engage in “side jobs” and part time ventures, like selling t-shirts on Ebay and  pot holders at craft shows.  This category also includes millions of one-person businesses, like the locksmith or tree trimmer who operates out of a vehicle.

Creating Jobs by Reinvesting After-Tax Profits

Also included in Ms. Tyson’s huge category of taxpayers are larger businesses, such as construction, or restaurant, or software  firms, with several employees, who are in a position to grow and create more jobs by reinvesting profits.  These are the businesses with more than $200,000 in taxable profits, who will be hit by Obama’s tax increase.  Every dollar of increased taxation, is one less dollar available to reinvest in expansion and job creeation.

Here are some data – some hard facts – from the IRS Statistics of Income Division for 2006, the latest available:

  • 54% of taxpayers reporting more than $200,000 in income were small business owners.
  • 61% of of all small business income was reported by taxpayers earning more than $200,000.
  • 2.2 Million small business owners reported more than $200,000 in income.

As the figures above demonstrate, more than half the over $200,000 taxpayers Obama intends to punish are businesses that are large enough to have several employees now, and the potential to expand and hire more employees in the near future.

This segment of the “small business” category creates nearly all the new jobs in America, year after year.

The Bottom Line

More small business expansion is funded by reinvesting after-tax profits than by borrowing.  Since bank lending contracted last summer small business access to credit has virtually disappeared.  Therefore, after-tax profits are even more critical if businesses are to expand and hire more people.

Since the government has no system to identify and count the jobs that won’t be created as a result of tax increases on businesses, Obama hopes we voters won’t realize what happened.

Government will be seizing from the private sector some of the resources that empower free people to use their liberty to create prosperity.  These resources will be used to expand government power and reward special interest constituencies with political connections.

10 Comments so far

  1. DGS Guru on March 11th, 2009

    Oh how you guys cry the blues for rich business owners.

    These businesses aren’t going to expand or hire anyone until consumers come back to the stores and malls and car dealers. It doesn’t matter if their taxes go up a little bit or down a little bit, there’s no demand out there for their products and services. thats the problem.

    Obama’s hitting that problem head on with increased federal spending to increase aggregate demand.

  2. Sarah Livingston on March 11th, 2009

    DGS Guru

    You are obviously not a business owner. You dont understand what this is all about.

    Even though unemployment is 8 or9 percent, that still leaves 91 or 92 percent employed and still spending money.

    Small businesses find new ways to bring new services or products to the marketplace that people will buy because they are better or cheaper or different. But its impossible to get a loan to expand a small business. the only way to do it is keep plowing the profits back into the business.

    Small business owners live for years on the equivalent of minimum wage in order to grow their businesses. Then your rich uncle sam comes along and takes a big chunk of it away from them.

    Obama wants to take more. A lot more.

    Have you heard of killing the goose that laid the golden egg?

  3. DGS Guru on March 11th, 2009

    You obviously don’t understand aggregate demand. It’s down. It’s in the toilet. Thats why we are in a catastrophic recession. thats why people are losing their jobs and thats why no business is going to expand until the economy turn around.

    Obama’s plan will turn the economy around. Republican’s invisible hand only feeds the rich even more riches.

    We’ve had 8 years of Republican economics and look what it got us!

  4. Chuck on March 11th, 2009

    The way to turn this economy around is just what Obama is doing – putting spendable money in the hands of moderate income people who will spend it. That will put us back to work to make the stuff those people buy.

    at the same time it gives some much needed help to people who have suffered under republican policies for years, seeing their income go down and finally losing their jobs and their houses.

    How can you possibly think its better to give even more money to the richest 3% than it is to help everyone else and turn the economy around at the same time????

    even the rich will be better off when the economy turns around.

  5. Sarah Livingston on March 11th, 2009

    OK, DGS Guru,

    What does “aggregate demand” mean to you?

    If we take money away from small businesses and give it to someone else, how is that better than letting the business owner use it as he or (in my case) she sees fit?

    Is demand from somebody with a government contract better than small business demand?

    How is demand increased by moving money around?

  6. Max I Mum on March 12th, 2009

    You say the government has no system to count jobs not created. That makes it impossible to prove or disprove your speculation, that tons of small businesses will create new jobs if the rich don’t have to pay a tax increase.

    I don’t necessarily side with Obama’s populist, eat the rich mentality, but on the other hand I don’t think the rich have to be coddled and treated like fragile china. the rich are capable of taking care of themselves. 12 million working families who just lost their income and are a different story.

  7. DGS Guru on March 12th, 2009

    We’re using taxation to move the money from the rich who don’t spend it and don’t increase aggregate demand. OK, some of those rich are also business owners. but they aren’t spending it either. they sure arent hiring anyone!

    Then we use the money that the rich wouldn’t have spent to pay people to build roads and schools and other infrastructure that we NEED! Some it goes to help people who are unemployed. All those workers and unemployed people will spend the money, adding to aggregate demand, which will force businesses to hire more people to keep up with rising demand.

    Also, there is the multiplier effect. When government uses money in this way it circulates throught the economy and multiplies. Its worth 2 or 3 times as much.

    this is a good thing! It will get us out of this deep hole Bush pushed us into.

  8. aaa again on March 12th, 2009

    I hope DGS isn’t an economics major………else that’s a big fat “F,” for analysis with few employment prospects.

    LOL That wasn’t worthy of a high school freshman!!

  9. aaa again on March 13th, 2009

    Sarah –

    “How is demand increased by moving money around?”

    You are correct. Its not.

  10. theCL on March 13th, 2009

    Thought I’d jump in here …

    … there’s no demand out there for their products and services. thats the problem.

    Why is there no demand? Do people lack the capital? If so (and indeed it is), then production (earnings) must increase first. Maybe my individual life is unique, but the only way I know of to get ahead, is to produce (earn) more than I demand (spend).

    You obviously don’t understand aggregate demand. It’s down … Thats why we are in a catastrophic recession.

    Again, you’re putting the cart before the horse. The major economic problem is because the entire financial system is upside-down in debt. Congress pushed the GSE’s to continually increase demand, and reduced their required capital to boot. And the Fed kept rates artificially low for years and years, again, to keep up the demand.

    But hey! It only got us into this mess, so let’s try it again some more!

    We’ve had 8 years of Republican economics …

    I hate to break your Red Team vs. Blue Team spirit … but we’ve had 8 years of exactly the same economic policy as we have now. The only difference is, “the One” has put the same failed policies on steroids!

    Think the last 8 years were bad … just you wait, because it’s gonna get much worse.

    We’re using taxation to move the money from the rich who don’t spend it …

    What exactly do they do … Stuff it in their mattress? Bury it in the backyard? Light their cigars?

    How can you possibly think its better to give even more money to the richest 3% than it is to help everyone else …

    Give? Do you actually think there’s a big pile of money laying around and the government doles it out?

    The government doesn’t have any money of its own. So before the government can “give” money to anyone, it first has to take it from somebody else.

    Also, there is the multiplier effect. When government uses money in this way it circulates throught the economy and multiplies. Its worth 2 or 3 times as much.

    Oh, I see … like magic!

    In a nutshell, if the Keynesian multiplier were true … It would make sense for the government to simply print money, send us all checks so we could go out and spend freely, and the economy would grow without anyone ever having to work!

    But of course … the multiplier is pure fantasy. Actually, more of an hallucination if you ask me.