The President is not yet serious about resolving the Fiscal Cliff crisis he helped create.

Due to negligence on the part of President Obama and Senate Democrats, 2011 and 2012 budget and borrowing issues were not resolved.  Instead the President actually signed into law a series of bills that add up to The Fiscal Cliff (TFC): Beginning New Years Day there will be spending cuts that mostly affect Defense and tax increases that will hit every taxpayer, at every income level.  Congress can prevent TFC only by passing new legislation before the end of December. 

Most but not all of the January 1 tax increases are listed in the table.  Here are a few more:

• For two years the employee’s share of the Social Security Payroll tax has been temporarily reduced from 6.2% to 4.2%.  It will  go back up January 1, affecting every employee at every income level.
• A new 3.8% ObamaCare tax will be levied on capital gains and dividends earned by high income tax payers.
• The Alternative Minimum Tax, a way of collecting extra taxes which – like most taxes – was originally sold as a only for the rich, is scheduled to expand, punishing tens of millions more taxpayers than ever before;
• Several special tax provisions that benefit small business will expire.

The current tax rates, (red in the table) called the Bush tax cuts or Bush tax rates have been in effect since 2003.  Democrats have tried several times to repeal some or all the Bush tax rates and reimpose the higher rates that were in effect before 2003 (blue in the table).  The most recent legislation, enacted in December 2010 raises all rates effective January 1. 

Inexplicably, Mitt Romney chose not to make this insanity a campaign issue, allowing Obama and the national media to conspire to hide it from the voters behind a smoke screen of fabricated controversies about Bain Capital, Big Bird, and contraceptives.

In answer to a question during the Vice Presidential Debate Joe Biden said Obama’s plan was:

The middle class will pay less, and people making a million dollars or more will begin to contribute slightly more.

Since the election Obama has not proposed to tax anyone less.  But he did lower the bar for a tax hike from a million dollars to $250,000.  At the press conference he answered a question by simply reciting a portion of his standard campaign speech:

When it comes to taxes, there are two pathways available.  Option one, if Congress fails to act by the end of this year, everybody’s taxes will automatically go up, including the 98 percent of Americans who make less than $250,000 a year, and the 97 percent of small businesses who earn less than $250,000 a year. That doesn’t make sense. Our economy can’t afford that right now. Certainly, no middle class family can afford that right now.

The other option is to pass a law right now that would prevent any tax hike whatsoever on the first $250,000 of everybody’s income. And by the way, that means every American, including the wealthiest Americans, get a tax cut. It means that 98 percent of all Americans and 97 percent of all small businesses won’t see their taxes go up a single dime.

Well, of course with so many different taxes and tax brackets there are a lot more than two options – there are hundreds of options.  But that aside, why did he try to assure us that 97 percent of small businesses wouldn’t suffer a tax hike?  Because he has polling data showing most of us understand that small businesses are the source of most new jobs and increasing the tax burden on those employers inevitably curtails job creation. 

But, as we have reported several times before, his 97% statistic is deeply misleading.  He generates this deceptive statistic by herding every taxpayer who reports income from a business activity into a single category he calls “small business.”

This category of taxpayer includes millions of one or two person businesses and a relative few larger businesses, such as construction, or restaurants, or software  firms, with several employees, who are in a position to grow and create more jobs by reinvesting profits.  

If 97% of all small businesses earn less than $200,000, the remaining 3% are the most important to growing the economy and creating jobs.  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 the expansion that is necessary for jobs to be created.

Here are some data – some hard facts – from the IRS Statistics of Income Division for 2009, the latest available:

• 65% of taxpayers reporting more than $200,000 in income were small business owners.
• 72% of of all small business income was reported by taxpayers earning more than $200,000.
• 2.6 Million small business owners reported more than $200,000 in income.

That the President would continue to repeat this deceptive small business statistic demonstrates that he is still in campaign mode and is not yet serious about resolving critical budget issues and removing the impediments to economic growth and job creation.

At his news conference Wednesday President Obama insisted on tax increases for “the wealthy” a strategy that directly targets small and medium sized businesses that are most likely to create jobs.  He was reminded by a reporter that he had agreed in 2010 to give up fighting for tax hikes and keep all the Bush tax rates in place.  Considering we face the same situation, a lame duck Congress with only a few days to prevent across the board tax hikes he  was asked why he would not agree to extend them again.  Part of his answer:

Well, two years ago the economy was in a different situation. We were still very much in the early parts of recovering from the worst economic crisis since The Great Depression, and ultimately we came together, not only to extend the Bush tax cuts, but also a wide range of policies that were going to be good for the economy at that point.

The chart to the left shows the last four quarters of GDP growth before the President decided in December 2010 that the economy was too weak to sustain a tax increase.  There had been one barely adequate quarter followed by three hopelessly weak quarters.  Such anemic GDP growth simply can not support the kind of robust job growth that some 23 million unemployed or underemployed Americans desperately need.  So the President decided, correctly, to go along with Congressional Republicans and even some Congressional Democrats who said a tax hike on high income taxpayers, mostly small businesses, would further weaken an already pathetic economy.

The next chart displays the economic report card the President’s advisers are showing him today.  It looks very similar to the situation in 2010, a mediocre quarter followed by three quarters too weak to rebuild a prosperous economy.  The difference is the weak quarters are even worse than they were in 2010!

Yet somehow Obama has determined that today’s economy is strong enough to sustain the same tax increases he rejected in 2010!

The President’s demand for tax hikes is a political act, disconnected from economic reality.  He campaigned against “the rich” and he is determined to whack them with a tax hike, even if it results in continued mass unemployment and economic misery for the middle class folks he claims are his primary concern.

…From the captivating Mrs. BoomerJeff:

President Obama and his media supporters tell us his jobs policies are a success and thus he deserved reelection.   But measured against either the historical record or the standard set by his own promises and projections his jobs record is a failure.

 To put the best spin on the Obama jobs record his campaign and his media allies disregard the job losses during each of Obama’s first 13 months and begin counting at month 14. [continued below the chart]The chart above compares Obama’s best 32 months with the first 32 months of every previous post-recession period of job growth over the past sixty years.  Each line on the chart starts a the first month of job growth after a 9 – 26 month period of recessionary job losses.

It’s true, as the media constantly remind us, that Obama inherited a deep recession with hundreds of thousands of job losses every month.  But it’s not true that “his policies,” including the largest surge in government borrowing and spending since mobilization for World War II, should be judged a success just because job losses ended and a period of job growth began. 

Every previous period of job losses resolved to a new era of job growth, no matter who was President and no matter what policies the government pursued.  After every previous recession over the last sixty years the subsequent era of economic growth and job growth was stronger than what we’ve experienced under President Obama. 

The Reagan recovery of the 1980s, at the top of the chart, resulted from economic strategies that were exactly the opposite of those pursued by Obama and the Democrats in Congress. 

Note that the 1958-61 recovery fizzled out and became a double dip recession but was still better than we’ve seen in the most recent 32 months.  The 1991-93 jobs recovery began very slowly but eventually accelerated to a rate that exceeded the 2010-12 rate.

The next chart compares the predictions the President offered to sell us on his ideas with the reality we now know in hindsight.  [Continued below the chart]

Obama’s January 2009 message describing his audacious plan to borrow and spend $860 billion over and above the government’s already bloated budget on “stimulus” or his so-called recovery act, is still here at Change.gov, the Administration’s transition website.  Here’s an excerpt:

I’ve taken the extraordinary step of working – even before I take office – with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will call for major investments to revive our economy, create jobs, and lay a solid foundation for future growth.

I asked my nominee for Chair of the Council of Economic Advisers, Dr. Christina Romer, and the Vice President-Elect’s Chief Economic Adviser, Dr. Jared Bernstein, to conduct a rigorous analysis of this plan and come up with projections of how many jobs it will create – and what kind of jobs they will be…

The report confirms that our plan will likely save or create three to four million jobs.

The report, still posted on the Change.gov website  here invoked Keynesian economic theories to explain how the now infamous “stimulus” or Recovery Plan would cause increased economic growth and create millions of jobs.  It included projections – that looked like promises – of specific numbers of jobs to be created as a result of the massive borrowing and spending.

Those projections and the actual jobs results are displayed in the chart above, showing that, against the standard of his own promises, Obama’s jobs record is a failure.

Measured by President Obama’s own criteria, his economic initiatives failed. 

The November jobs report was released Friday.  The unemployment rate ticked up slightly to 7.9%.  Compared with the President’s predictions and promises this number represents massive failure.

As Barack Obama assumed office in January 2009 America was suffering from a severe recession.  Rahm Emanuel, his chief of staff revealed in a TV interview what would turn out to be the Administration’s operating premise for the next two years.

Obama enthusiastically adopted the Emanuel Doctrine, presenting the recession as a pretext to justify new legislation for tired old Democratic Party agenda items:

• Government run health care;
• Energy rationing through so-called “cap and trade; and
• Accumulation of power and loyalty through a gusher of government cash to favored voter constituencies and politically connected companies.

Obama’s first initiative was a massive spending bill he called his Recovery Act or stimulus, enacted on his 21st day in office.  The chart above came from a pseudo-academic report, pumped out by Obama’s economic team to embellish his stimulus sales pitch with a patina of intellectual legitimacy.  The Report’s predictions and recommendations were typical of the work of partisan “economists” in Washington who present themselves as wizards, able to create predictable and glorious results through government borrowing, spending and economic intervention.

Based on the chart and the other predictions in the report, and urged on by an exultant media, Congress enacted the trillion dollar stimulus.  Most of the stimulus initiatives were structured to become permanent, annual add-ons to the federal budget “baseline,” adding to Obama’s breathtaking deficits.  The stimulus, while symbolic, was of course only the first step in the Obama agenda of aggressive expansion of the size and cost of government.

Tuesday’s Presidential election should be a major decision point:

• Will we vote to continue submitting to politicians and their wizards, like the ones who created the chart above, allowing them to assume more and more power over our business and personal lives, to borrow more and more in our names, and to extract and divert more and more of our resources based on nothing but the predictions of “experts?”

Or

• Will we vote to put the breaks on government’s relentless accumulation of power and squandering of precious resources?  Will we vote to transition back to what has always proven to produce prosperity, that is maximum possible individual liberty, with a government of limited power whose mission is to protect and serve, but not control the people?

On November 6, 1984 voters rewarded President Ronald Reagan with a record shattering reelection victory.  Twenty Eight years later November 6, 2012, President Barack Obama’s reelection odds appear to be even at best.

The Commerce Department has released it’s quarterly report.  Gross Domestic Product (GDP) was up 2% during the third quarter, 2012.  While the Obama campaign tries to spin this as happy news, it’s way below average and tens of millions of Americans feel acute pain in an anemic economy. [continued below the chart]After a campaign based on the broad themes, appealing to all demographic groups Reagan won 49 states and the largest electoral college vote tally in history. 

Today, Obama’s campaign team is so desperate to attract the attention of micro segments of potential voters, they produced an ad targeting only the least informed and most politically naive young women with pure emotional appeal.  It seeks to make first time voting seem more interesting by comparing it to first time sex: “you want to do it with a really great guy.”  It even tries to plant the preposterous perception that the President guarantor of contraceptives, which would no longer be available if Obama is not reelected.

Presidents Reagan and Obama each inherited a deep recession, each caused by a financial crisis.  By most measures the Eighties recession was worse than 2008-09.  During 1981 and 1982:

• Mortgage rates topped 16%, compared to 5% during the 2008-09 recession. 
• Unemployment spiked up to 10.8% and remained above 10% for ten months compared to a one-month peak of 10% in 2009. 
• Inflation soared above 10% in 1981 compared to slightly negative in 2009 and 1.6% in 2010.
• Thousands of banks and Savings and Loan institutions went out of business.
• Similar to the current downturn, house prices plummeted and the foreclosure reate hit record highs.

Yet voters propelled Reagan to a landslide reelection victory while Obama’s campaign is reduced to scratching for improbable votes with eleventh-hour appeals to tiny demographic groups in certain counties of three or four battle ground states.

Incumbent Presidents start their reelection campaigns with major advantages.  There have been 24 Presidential elections in which incumbents were running for second terms.  Seventeen or 70% of those incumbents defeated their challengers.  Why, with all the advantages of incumbency and the overwhelming support of the national media, is President Obama likely to lose his reelection bid?  The chart above summarizes the answer.

The big difference between the 1980s post-recession economy and the current situation is the government response.  Presidents Bush and Obama responded to the downturn that began in 2008 by launching several interventionist initiatives that enhanced the power and control of government over the economy.  Bush initiated bailouts of insolvent banks and Wall Street firms and “stimulus” in the form of a small tax rebate.  Obama continued and greatly expanded Bush’s strategy with ObamaCare, masses of new regulations, subsidies to politically favored industries and bailouts of unionized car companies. 

President Obama, a disciple of Keynesian economic theory launched the largest non-military spending increase in US history, to “stimulate” the economy.  His supporters now say tepid economic growth and failure replace millions of lost jobs was not because “stimulus” through government spending is a bogus economic theory but because Obama didn’t spend enough!

To satisfy their Leftist political supporters Obama and the Democrats have scheduled several tax increases, mostly targeting small business, to begin at the start of 2013.  Businesses appear to be scaling back in anticipation of these new burdens but Obama does not seem inclined to do anything to prevent them. 

In 1982 President Reagan responded to recession with historic tax cuts and by scaling back government regulation and intervention.  Insolvent banks and companies went through the normal bankruptcy processes and either ceased to exist or emerged stronger. 

Obama has diverted resources from private investment to subsidies for companies engaged in politically favored businesses such as battery powered cars and solar energy production.  Some of those companies are owned by politically connected, Obama campaign donors.   Several of them have gone out of business after wasting billions of tax dollars that will never be recovered. 

Reagan allowed the private sector to operate on it’s own with investors and entrepreneurs deciding how to deploy economic resources in the most effective ways possible, without regard to politics. 

The economic results, in the form of GDP growth displayed in top chart speak for themselves.  After four years voters demonstrated their approval of Reagan’s roaring economic victory with a  decisive victory at the polls. 

Obama’s aggressive government intervention into the private sector has been an economic failure and is likely to yield an election day failure as well.

Can government pay for new infrastructure initiatives with imaginary money?

The President has contradicted himself several times, most recently during the second debate. But so far the media have been too obsessed with Romney’s binders to notice.  In the first debate President Obama was asked about the deficit.  His answer, in part, was:

When I walked in the Oval Office, I had more than a trillion dollar deficit greeting me, and we know where it came from. Two wars that were paid for on a credit card.

Since the government never collected less than ten times as much tax revenue as it spent on Iraq and Afghanistan each year, one wonders how Obama decided that the wars, rather than other expenses were “paid for on a credit card.”  A cynic would say he picked the wars because they were Bush initiatives.  A cynic would be correct.

The first question in the second debate was from a college student who was concerned that half of recent graduates are unemployed or working low skill, low paying jobs.  He asked, “What can you say to reassure me, but more importantly my parents, that I will be able to sufficiently support myself after I graduate?”

Part of the President’s non-responsive answer was:

We’ve got to reduce our deficit, but we’ve got to do it in a balanced way. Asking the wealthy to pay a little bit more along with cuts so that we can invest in education like yours.  And let’s take the money that we’ve been spending on war over the last decade to rebuild America, roads, bridges schools.

Wait a minute!  If the wars have been “paid for on a credit card” then where did Obama get the idea that the absence of war generates surplus, left over funds for other priorities?

This isn’t the first time the President has claimed that fictitious “savings” from not continuing the wars for another ten years creates surplus resources to be redeployed.  Earlier this year during the debt ceiling debate, a crisis brought on by profligate government spending, he demanded that Congress enact yet another stimulus, then called his “jobs bill” that would have cost $400 billion.  He insulted our intelligence by offering to “pay for it” not with cuts to other spending this year, not even with tax increases this year.  He said he would “pay for” borrowing an additional $400 billion in 2012, by not continuing the war in Iraq, which was already over, until 2021!

Obviously these ideas are utterly absurd.  But don’t expect the so-called “fact checkers” to say anything that might seem to discredit President Obama.

During the Second Presidential Debate, to head off the valid criticism that his tax increase on “the wealthy” would curtail small business expansion and thus limit job creation, President Obama asserted this misleading, irrelevant statistic:

So what I’ve said is, your first $250,000.00 worth of income, no change. And that means…97 percent of small businesses, they will not see a tax increase.

The President generates this deceptive statistic by herding every taxpayer who completes the IRS forms for reporting income from a business activity into a single category he calls “small business.”

This category of taxpayer includes millions who engage in “side jobs” and part time ventures, and one-person businesses.

Also included in Obama’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.  

If 97% of all small businesses earn less than $200,000, the remaining 3% are the most important to growing the economy and creating jobs.  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 that is necessary for jobs to be created.

Here are some data – some hard facts – from the IRS Statistics of Income Division for 2009, the latest available:

• 65% of taxpayers reporting more than $200,000 in income were small business owners.
• 72% of of all small business income was reported by taxpayers earning more than $200,000.
• 2.6 Million small business owners reported more than $200,000 in income.

The Bottom Line

More small business expansion is funded by reinvesting after-tax profits than by borrowing.  Under new banking regulations, small business access to credit has all but disappeared.  Therefore, after-tax profits are even more critical if businesses are to expand and hire more people.

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 fund special interest constituencies, such as Obama donors in the alternative energy business.

As the chart above demonstrates, two thirds of 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.

Obama’s case against the Bush Tax Cuts is based on misinformation and deception.

Third in a three part series:  Part 1  Part 2

During his debate with Paul Ryan Vice President Biden attempted to deceive us regarding the Bush tax cuts and Romney’s proposed tax cuts.  In a jumble incomprehensible sentence fragments he hurled out a lot of figures that were intended not to inform, but to cajole a shocked reaction from the listener.  He said $800 billion “goes to” people making over a million dollars.  It wasn’t clear if that happened in the past or he he wanted us  to fear that it would happen in the future.

Biden’s use of the term “goes to”  is perhaps most enlightening because it confirmed the underlying assumption that everyone’s income is a government resource to be  distributed via political processes.  Biden and the Administration he represents consider the portion of if our income we are allowed to keep after taxes to be a grant to us from government.

The perception Joe Biden and the Obama campaign hope to plant in the mind of the listener is that the government’s cash shortage is caused not by the massive spending surge since 2009, but by the Bush tax rates being too generous to high income taxpayers.  But Biden, who probably doesn’t bother to look at government financial reports didn’t discuss the most significant tax revenue data. [continued below the chart]

The chart tracks income tax revenue from top bracket taxpayers earning over $500,000 from 1999 through 2009, the latest year for which IRS statistics are available.  It shows a dramatic revenue increase after tax rates were reduced in 2003.   As the red line shows, the average, effective tax rate paid by these high income taxpayers went down because the Bush tax cuts of 2003:

• lowered the top tax bracket rate for “ordinary income” (salaries and business profits) from 39.6% to 35%
• Lowered the top rate for capital gains from 20% to 15%
• Lowered the top rate for stock dividends from 39.6 to 15%.

A taxpayer’s “effective tax rate” is the amount of tax dollars paid divided by adjusted gross income.  Typically, high income taxpayers’ effective rate results from a blend of ordinary income, taxed at 35%, and capital gains and dividend income taxed at 15%.

The “Bush tax cuts” enacted in 2003 are still in effect.  In 2007 more tax revenue was collected from high income taxpayers than any previous year, ever.

However, the recession caused a sharp drop in the taxable income of the wealthy, because most of their income is from investments and/or ownership of small businesses.  

As a consequence the chart above shows that revenue from high income taxpayers went down, even as their effective tax rate went back up, because the recession drove down income from capital gains and dividends.

If Obama’s only goal were to maximize revenue to the government he would enthusiastically support the current tax rates as – to use one of their favorite words for government policy – “smart” because:

• The capital gains tax is voluntary.  It comes due only when an asset that has appreciated in value is sold.  Obviously, people are more likely to sell when the tax is lower.  Throughout it’s history the capital gains tax has consistently generated more revenue at lower rates and less revenue at higher rates.
• Stock dividends are the investors’ share of corporate profits remaining after payment of corporate income tax, as high as 35%.  Thus the investor’s individual tax is a second levy on the same corporate profits.  When the individual tax rate on dividends was higher companies paid smaller dividends or no dividend at all because investors wanted to avoid double taxation and preferred profits to be deployed in ways that might enhance the market value of the stock.  After the tax rate on dividends was reduced investors looked for stocks that paid dividends and companies responded by paying more.  Thus, the government is now collecting taxes on dividend income that did not exist before the rate was brought down and would disappear and thus generate now tax revenue if the rate went back up.

In addition to to generating more revenue to the government, lower tax rates on dividends and capital gains also benefit the economy in general and those who seek jobs in particular:

• When considering a new or expanding enterprise that may create jobs investors consider the risk vs the potential reward.  The tax they expect to pay in the future when the investment matures and they sell it is part of the consideration.  If the rate is higher they will be less likely to invest.
• When people sell assets they look for new investments for the funds they receive, including business start-ups and business expansions that generate jobs.  If the capital gains tax rate is higher they are less likely to sell and thus, those new start-ups are less likely to come into existence.
• When investors receive dividends they seek new investment opportunities for those funds, including job creating business start-ups and expansions.

By the way, taxpayers in all brackets pay lower rates on capital gains and dividends than they do on ordinary income.  In fact capital gains are tax free for taxpayers whose ordinary income rate is 15%, which would include most families who earn less than about $90,000, and some who earn even more.