Why America Will Miss the Bush Tax Cuts
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Economy Continues to Send Mixed Signals
2. Why America Will Miss the Bush Tax Cuts
3. Fiscal Cliff Negotiations Remain in Stalemate
4. 2012 Budget Deficit Falls to ONLY $1.1 Trillion
As I opined in my blog last Thursday, I believe that President Obama is more than happy to see us go over the “fiscal cliff” at the end of this year. Many, including Fed Chairman Ben Bernanke and the CBO, believe that if we go over the fiscal cliff, the combination of tax increases and mandatory spending cuts will send the economy back into a recession next year. At the same time, the stock markets could get hit very hard.
As I suggested in my blog, if we go over the cliff, it may be that Obama will introduce new legislation early next year to reinstate the Bush tax cuts for families making less than $250,000 and likewise reduce some or all of the spending cuts required as a part of the sequestration. A lot of politicos believe this is exactly what will happen if we go over the cliff. That way, Obama can look like a hero to his supporters.
The president has laid blame for the fiscal cliff (and everything else wrong in America) on President George W. Bush and the Republicans in the House. He has also said that the Bush tax cuts caused our deficits to soar out of control, even though he now says he wants to keep those same tax cuts for all but the “millionaires and billionaires” (defined as individuals making over $200,000 and families making over $250,000 a year).
The mainstream media have been so critical and dishonest about the effects of the Bush tax cuts that most Americans don’t know about the benefits of lower tax rates, even though they have been in place for a decade or more. I just read the most informative article on the Bush tax cuts that I have seen anywhere. The article is by Peter Ferrara at Forbes.com. I have reprinted it for you below.
But before we get to that, let’s take a look at the latest economic reports which have been a mixed bag once again.
Economy Continues to Send Mixed Signals
On Thursday, November 29, the government reported that 3Q GDP rose at an annual rate of 2.7%, up from only 2.0% in its advance estimate a month earlier. The number was close to the pre-report consensus of 2.8%. The Commerce Department found that inventory rebuilding was stronger than expected in the 3Q. Exports were also better than expected. That was the good news.
The bad news was that consumer and business spending were both revised lower. It was the first drop in business investment in more than a year. Consumer consumption spending was slashed from an increase of 2.0% in the advance report to only 1.4%. The expectation was for 1.9%, so this was disappointing.
Most forecasters now believe that the inventory building in the 3Q mostly vanished in the 4Q, and most estimates for 4Q GDP are coming in with growth only around 1%. Thus it won’t take much to push the economy into a recession next year, with or without us going over the fiscal cliff.
On Friday, the University of Michigan’s Consumer Sentiment Index for December plunged to 74.5, down sharply from 82.7 in November. The expectation was for 82.4, so this was a big surprise. Americans’ outlook on the economy and their finances took a turn for the worse this month due largely to anxiety about the potential for higher taxes resulting from the fiscal cliff.
The same survey’s gauge of consumer expectations for the near future also tumbled from 77.6 at the end of November to only 64.6 for this month. That was far below the expectation of 78.0. The survey's measure of consumers’ 12-month outlook also fell hard in early December. It dropped 22 points from 97 in late November to 75, the lowest level since August.
On the manufacturing front, the ISM Index fell from 51.7% in October to only 49.5% in November. This was the lowest level since July 2009. The expectation was that the index would remain flat at 51.7% last month. An ISM reading below 50 indicates that more manufacturers are shrinking instead of expanding. The index has now fallen in four of the last six months. The ISM’s new-orders gauge sank to 50.3% from 54.2% in October.
The unemployment rate for November surprisingly fell to 7.7% from 7.8% in October, but for the wrong reasons. The good news was that the economy added 146,000 jobs in November, considerably better than expectations. The bad news was that the report showed that the exodus of workers from the labor force continues.
Remember, if people are not looking for work, they are not counted as unemployed in the headline number. But if you dig deeper into the employment report, you find that the real unemployment rate is 14.4% if you include those who have given up looking for work and those who are working part-time because they can’t find a full-time job.
Peter Schiff, chief global strategist at Euro Pacific Capital, described the report as follows: "Same old, same old. The government managed to get the unemployment rate down by shrinking the labor force and convincing a lot of people they’re better off collecting unemployment benefits or living off welfare than working. It's more bogus government numbers."
On the housing front, there were mixed signals, but at least there was some good news. Core Logic, a real estate tracking firm, reported last week that October home sale prices were 6.3% higher than one year ago. It was the largest monthly jump since July 2006. The report noted that home prices rose in 45 states in October. The five states where prices declined were Illinois, Delaware, New Jersey, Alabama and Rhode Island.
New home sales were flat in October, and existing home sales were up slightly. Housing starts were also up slightly. Building permits were down slightly in October.
This is a fairly quiet week for economic reports. The highlight will be on Thursday when we get the retail sales report for November, which is expected to show an increase of 0.5%. On Thursday and Friday we get the wholesale (PPI) and consumer (CPI) price indexes. Next week on December 20, we get the third and final estimate of 3Q GDP.
Now, let’s move on to the very interesting article I discussed earlier regarding the Bush tax cuts that are scheduled to expire automatically at the end of this year. Author Peter Ferrara does a great job in pointing out the truth about the Bush tax cuts.
Why America Is Going To Miss The Bush Tax Cuts
President Obama seems to have a strategy to terminate all of the Bush tax cuts, not just those for “the rich,” as he has been saying since 2008. He is offering the Republicans exactly zero concessions in the “fiscal cliff” negotiations. No [meaningful] spending cuts, no entitlement reform, no compromise on the rates. It is entirely my way or the highway, and if the Republicans refuse to do everything exactly as he demands, he will let the Bush tax cuts expire entirely, for the middle class and working people as well as the upper incomes, and blame the Republicans for refusing to go along with him, and for the economic results.
It is a cynical game worthy of an undeveloped, third world country, not the United States of America. But this is just one more reason, with many more to come, for the American people to regret the mistake they made on Election Day.
Because so many major media institutions, like the New York Times and the Washington Post, have been so duplicitous and dishonest in discussing the Bush tax cuts, most Americans don’t know much about them, even though they have been living with them for 10 years or more now. Indeed, most of what they think they know is not true. But the American people will understand them better, when they see what life is like without them.
President Bush and his Congressional Republican majorities at the time cut taxes for everyone in the 2001 and 2003 tax cuts. Indeed, they cut more for lower and middle income taxpayers than they did for “the rich,” as Obama calls the nation’s job creators, investors, and successful small businesses. The top tax rate was cut by only 13%, while the lowest rate was cut by one-third, 33%.
According to official IRS data, the top 1% of income earners paid $84 billion more in federal income taxes in 2007 than in 2000 before the Bush tax cuts were passed, 23% more. The share of total federal income taxes paid by the top 1% rose from 37% in 2000, before the Bush tax cuts, to 40% in 2007, after the tax cuts.
In contrast, the bottom half of income earners paid $6 billion less in federal income taxes in 2007 than in 2000, a decline of 16%. The share of federal income taxes paid by the bottom 50% declined from 3.9% in 2000 to 2.9% in 2007.
The Bush tax cuts also included a doubling of the child tax credit from $500 per child to $1,000 per child. Because of that, and the 33% cut in the bottom tax rate, nearly 8 million more people dropped off the federal income tax rolls entirely, paying zero federal income taxes. Indeed, under the Bush tax cuts, the bottom 40% of all income earners not only paid no federal income taxes, as a group on net. By 2009, they were being paid cash by the IRS equal to 10% of all federal income taxes.
These Bush tax cuts did not explode the deficit, as Obama and his echo chamber have alleged. By 2007, the deficit was down to $160 billion, less than 15% of Obama’s deficits today. Total federal revenues soared from $793.7 billion in 2003, when the last of the Bush tax cuts were enacted, to $1.16 trillion in 2007, a 47% increase. Capital gains revenues had doubled by 2005, despite the 25% capital gains rate cut adopted in 2003. Federal revenues rose to 18.5% of GDP by 2007, above the long term, postwar, historical average over the prior 60 years. CBO was projecting surpluses to return indefinitely in 2012 through the end of its projection period in 2018.
Bush did increase federal spending as a percent of GDP by one-seventh, erasing the federal spending cuts enacted by the Republican Congressional majorities in the 1990s. But even with that, deficits during the Bush years averaged just 2% of GDP, one-third less than the average over the prior 50 years. President Obama’s deficits have averaged 5 times as much, at 9.1% of GDP. [Emphasis added.]
The proof is in the pudding over the Bush tax cuts. They were followed by a record 52 straight months of job creation, producing 8 million new jobs, with the unemployment rate falling to 4.4%. Business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter, producing all those new jobs.
Because of that increased investment, labor productivity soared by 2.5% annually from 2003 to 2007, higher than the averages of the 1970s, 1980s, and 1990s. As a result, real after tax income per capita increased by more than 11%.
Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled. After the Bush tax cuts started in 2001, quickly ending the 2001 recession, the economy continued to grow for another 73 months. From 2000 to 2007, real GDP grew by more than 17%, meaning an additional $2.1 trillion for the American people.
This was mostly the opposite of what President Obama has produced, with his… Obamanomics, particularly unemployment more than twice as high, declining middle class incomes, soaring poverty, weak job growth, stagnant stock market values, collapsing business investment, and negligible growth in GDP.
Of course, the Bush tax cut boom was ended by the 2008 financial crisis. But as discussed in many previous columns, that was caused by the excessive overregulation of President Clinton’s home ownership promotion policies, creating the subprime mortgage market and the housing bubble, and by President Bush’s cheap dollar monetary policies. Obama’s foolish argument that the Bush tax cuts caused the 2008-2009 recession is so dishonest that abusive propaganda alone should disqualify him from office.
Obama’s gleeful termination of the Bush tax cuts will produce just the opposite results of those tax cuts. The combination of all the tax rate increases, along with Obama’s abusive overregulation, and the Fed’s continued mischief, will throw the economy back into recession next year. Unemployment will soar back into double digits, breaking the post depression record of 10.8%. The deficit will soar to over $2 trillion, setting new all time world records. The national debt as a percent of GDP will gallop past Greece.
Middle class incomes will plummet further. Poverty will soar to new all time records.
We can’t afford the Bush tax cuts, as Obama says? We can’t afford to terminate them. Over the past 45 years, every time the capital gains tax rate has been increased, capital gains revenues have declined rather than increased. Obama’s 60% increase in that rate will have the same effect. After the Bush cut in taxes on dividends, dividends paid soared, and so did taxes paid on those dividends. Obama’s near tripling of that tax will have the opposite effect as well. Indeed, if the economy declines back into renewed recession, total federal revenues will decline rather than increase.
[Editor’s Note: Obama intends to raise the capital gains tax rate from 15% to 20%, not by 60%. It is the dividends tax rate that will rise from 15% to 39.6% or higher if Obama gets his way.]
Obama’s ploy of blaming all of this on the Republicans will not work this time. The public knows the Bush tax cuts were adopted into law by the Republicans, with complete Republican control of Congress and the White House at the time. It will be too obvious that it took President Obama and his new neo-Marxist Democrat Party to let them expire.
Enjoy the new Obama recession. You and your neighbors voted for it. [Emphasis added.]
Fiscal Cliff Remains at Stalemate
President Barack Obama and House Speaker John Boehner met on Sunday at the White House to discuss the dispute over the US budget and the fiscal cliff. The meeting was the first known face-to-face conversation between the two leaders since November 16 when Boehner and other congressional leaders sat down with Obama at the White House. They have talked on the telephone since then.
Obama and Boehner are once again trying to reach an agreement that would prevent more than $600 billion in automatic spending cuts and tax increases from taking effect in January. Spokespersons for both the president and the House speaker would not divulge any details regarding Sunday’s meeting.
Ever since the election, Obama has warned that he will not sign any deal that does not eliminate the Bush tax cuts for those individuals making over $200,000 and families making over $250,000. The Republicans, on the other hand, have offered a compromise that reportedly would result in $800 billion in new tax revenue over 10 years by reducing income tax deductions (the details are as of yet unknown), and the Bush tax rates would remain as they are now for everyone.
Earlier this month, President Obama threw a new wrinkle into the mix: He insists that the debt ceiling be abolished permanently. The biggest spending president in history now wants the statutory debt ceiling eliminated – imagine that! The debt ceiling has been in place since 1917. We’ll see how this plays out.
As noted above and in my blog last Thursday, I believe that the president is more than willing to take us over the fiscal cliff. I could be wrong, of course, and maybe he and Boehner can make some kind of deal. But Obama feels very confident especially after being re-elected by a comfortable majority of American voters.
The other problem is time. Congress is scheduled to adjourn for the holidays on Friday, December 21. That leaves precious little time to make a deal, especially if it is to include the controversial elimination of the debt ceiling.
2012 Budget Deficit Falls to ONLY $1.1 Trillion
In case you missed it, the Treasury Department reported that the federal budget deficit for fiscal year 2012 (which ended on September 30) was $1.1 trillion, down from apprx. $1.3 trillion in FY2011 and almost that much in FY2010.
2012 was the fourth consecutive year of trillion-dollar budget deficits totaling a whopping $5.1 trillion in new debt. The projected deficit for FY2013 is almost a trillion at $901 billion.
In case you’re wondering how Obama’s deficits compare to other presidents, I ran across the following graphic that goes all the way back to President John F. Kennedy’s day. Each president’s average deficits are measured as a percent of GDP during their time in office.
As you can see, President Obama’s deficits are almost double any others over the last 50 years! The national debt is now at $16.266 trillion. Some fear it will hit $20 trillion over the next four years. A majority of American voters apparently believe this can go on indefinitely. How sad!
Best holiday wishes,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.