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President Proposes $4 Trillion Budget & New Tax Increases

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

February 3, 2015

IN THIS ISSUE:

1.  Gross Domestic Product Disappoints in the 4Q

2.  Fed’s First Policy Meeting of 2015 – What to Do?

3.  Obama’s $4 Trillion Budget & Big Tax Increases

4.  Tax Increases to Fund Obama’s Spending Bonanza

5.  Obama Wants to Shut Down Trans-Alaska Pipeline

Overview

Most every year about this time, I criticize the sitting President of the United States for submitting an ever-larger federal budget that almost always includes a big deficit which adds to our massive national debt. I have criticized every president for this going all the way back to Ronald Reagan who also ran budget deficits, especially in his second term. Yes, I even criticized “The Gipper” who sparked my initial interest in politics way back in 1976.

Given my long history of speaking out on this issue, I see no reason to make an exception today. On Monday, President Barack Obama submitted the largest proposed federal budget in history to Congress. In the past, most presidents who were shellacked in the mid-term elections tended to compromise in order to work with the opposition in Congress. Not this president!

The president’s proposed federal budget for fiscal year 2016 is a whopping $3.99 trillion which would increase spending for government agencies by a whopping 7% and includes numerous onerous tax increases to pay for most of it. Yet even with the tax increases, the FY2016 deficit is projected to be $474 billion.

The reality is that this is all simply political theatre. The president knows he won’t get nearly all of the new spending increases and taxes on the wealthy and corporations he proposes, what with a Republican-controlled Congress. But he does throw a very large bone to his liberal political base, while making the Republicans look like the “Party of No.”  

In any event, I’ll briefly summarize the president’s latest record-large budget proposal today, and you can make of it what you will. But before we go there, let’s take a look at last week’s disappointing 4Q GDP report and what transpired at the Fed’s first policy meeting of 2015.

Gross Domestic Product Disappoints in the 4Q

The US economy expanded at a slower pace than forecasted in the 4Q with cooling business investment, a slump in government spending and a widening trade gap that took some of the luster off the biggest gain in consumer spending in almost nine years.

Gross domestic product grew at only a 2.6% annualized rate in the 4Q according to the Commerce Department, as compared to the 3.2% pre-report consensus. This was the government’s first estimate of 4Q growth, and it will be revised two more times in February and March.

Perhaps equally disappointing was Commerce’s revision of 3Q GDP to 4.1%, down from the 5.0% previously reported. For all of 2014, GDP expanded 2.4% – only slightly better than the average 2.2% annual growth of 2010-2013. By comparison, GDP growth averaged 3.4% a year during the 1990s.

Many forecasters expect similar growth of only 2%-3% in the current quarter as turbulence in Europe and Asia, coupled with the stronger US dollar, threaten to hit manufacturers and weaken exports.

4th quarter initial change at annual rateThe good news in last week’s GDP report was the fact that consumer spending grew at an annualized rate of 4.3% in the 4Q, the highest pace since early 2006.  Thanks to the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely.

The housing market continues to underperform, although real estate construction picked up slightly in the 4Q. Residential investment rose at a 4.1% pace in the 4Q, up from the 3Q’s 3.2% rate.

Unfortunately, the other major components of output flashed new signs of weakness in the latest report. Business investment – reflecting spending on equipment, software and intellectual-property – grew at a paltry 1.9% rate. And government spending declined at a 2.2% pace, reflecting a sharp drop in defense outlays.

Despite the economy’s expansion, inflation has been heading down, due largely to a sharp drop in oil prices since the summer. The price index for personal consumption expenditures (PCE) – the Fed’s preferred measure for inflation – fell at a 0.5% annual rate in the 4Q, compared with the 1.2% annualized increase in the 3Q. The decline in PCE in the 4Q complicates matters for the Fed, as I will discuss below.

All in all, last week’s advance estimate of 4Q GDP was definitely a disappointment.

Fed’s First Policy Meeting of 2015 – What to Do?

The Fed’s Open Market Committee (FOMC) met last Tuesday and Wednesday. The makeup of the FOMC is different this year – gone are Richard Fisher (Dallas Fed) and Charles Plosser (Philadelphia Fed), two of the more hawkish former members. As a result, there was a unanimous vote to approve the Committee’s official policy statement released last Wednesday afternoon.

Fed Open Market CommitteeThe statement had few surprises but it is clear that the Fed wants to start to normalize interest rates as soon as possible. However, it may be later rather than sooner given that inflation continues to fall, both here and in Europe and elsewhere. Here are the highlights from the policy statement.

First, the statement cited continuing improvement in the jobs market. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.   On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.” That’s Fed-speak for the economy is getting better.

Next, the statement included a fairly sizable section of text warning about low inflation. Specifically, the statement said that “Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Without saying so specifically, the Committee is clearly worried about the growing risk of deflation.

Third, the statement continued to include the word “patient” as it pertains to when the Committee might move to raise the Fed Funds rate from near zero where it has been since 2008. Based on comments from Fed Chair Janet Yellen last year, most analysts expected the Fed to raise the rate around the middle of this year. However, with inflation so much lower than the Committee wants, the thinking now is that a rate hike won’t come until this fall most likely.

While the policy statement made no mention of the considerable rise in the US dollar since last summer, there is no doubt that it is on the minds of the FOMC members. The rise in the dollar is putting downward pressure on commodities and inflation expectations, and that’s what the Fed appears to be getting more worried about. We’ll see if there is any discussion about the rising dollar when the actual minutes of the latest FOMC meeting are released in a few weeks.

The next FOMC meeting will be held on March 17-18.

Obama’s $4 Trillion Budget & Big Tax Increases

Here’s a summary of President Obama’s latest record-large federal budget proposal for FY2016 that he unveiled yesterday. The president proposed a nearly $4 trillion budget package on Monday, which he claims is aimed at improving the nation’s infrastructure and boosting middle-class Americans. But it comes with a cost of tax increases on businesses and the wealthy as well as an end to existing spending caps (sequestration).

The budget, much of which Mr. Obama has detailed over the past month, makes a case for easing Washington’s emphasis on deficit-reduction measures, given the strengthening economy. It makes no new effort to fix the swelling costs of Social Security and Medicare.

Proposed budgetThe proposed budget calls for $3.99 trillion in spending and $3.53 trillion in revenue, while running a $474 billion deficit in the fiscal year beginning October 1 – even though Obama claims his new spending plans are “fully paid for.” Obama’s budget plan never reaches balance over the next decade and projects the annual deficit would rise to $687 billion in 2025.

The 2,000-page plan calls for an end to the automatic, across-the-board spending cuts that both parties agreed to four years ago, dismissing them as “mindless austerity” brought about through “manufactured crises.” Lawmakers reached a bipartisan deal to ease some of the cuts two years ago, but that deal expires in October.

Little in the White House budget is expected to advance in the GOP-controlled Congress; however, many Republicans want to increase spending for the military and infrastructure, so there is some hope for some modest deals later this year. But I wouldn’t hold your breath.

Several of the president’s proposals have already evoked a strong backlash on Capitol Hill. Last week, the administration dropped a plan to tax so-called 529 college savings accounts after Republicans said it amounted to a tax hike on the middle class. Top Democrats privately convinced the Obama administration to scuttle the idea.

The budget includes $561 billion in military spending, which includes funds for the West’s confrontation with Russia over its incursion in Ukraine and the US-led fight against Islamic State militants in Iraq and Syria. It also reserves $14 billion for cybersecurity measures.

The budget also includes a 1.3% raise for federal employees, up from this year’s 1%; a larger child tax credit – $3,000 per kid – and a $500 tax credit for “second earners” that would apply to working families; and a free two-year ride at community colleges for students who qualify. The program would cost $60 billion over the next decade.

Lawmakers and Mr. Obama have also expressed hope of reaching an agreement on an overhaul of the tax code, but have shown few signs of being able to forge the politically difficult compromises required. Don’t hold your breath on that one either.

Tax Increases to Fund Obama’s Spending Bonanza

As stated in his State of the Union speech last month, President Obama wants to increase income, capital gains and dividends taxes by a whopping $1.44 trillion over the next 10 years in order to finance tax cuts for low and middle-income earners and other spending projects.

In order to pay for these tax cuts and increased spending, Obama would raise taxes on the wealthy, corporations and large financial institutions. These tax increases include a big boost in the capital gains and dividends rate to 28% for top income earners, as well as a new capital-gains tax on many inheritances. Those two changes would supposedly generate about $208 billion over the next decade.

The White House proposes to limit the value of income-tax deductions and other breaks for the well-to-do, as it has in past budgets. This year’s version would supposedly generate an additional $603 billion over the next 10 years.

Other changes would close a range of so-called loopholes, such as a tax break that allows private-equity managers to pay low rates on much of their income. The White House also would impose more taxes on some self-employed professionals. It would limit the value of individual retirement accounts by preventing people from accumulating tens of millions in them. (See article below on Obama’s record on taxing the rich.)

Percent of Federal Income Taxes Paid by Income PercentilePerhaps the most controversial part of Obama’s new tax proposals is his intention to tax foreign profits of US multinational corporations that are held offshore. It is estimated that US corporations hold at least $2 trillion in profits offshore, rather than bring them home and pay a 35% tax rate.

The president now proposes to tax those existing offshore profits by 14% and then tax any future foreign profits at a rate of 19%. The 14% tax would be due immediately. These two changes would supposedly generate over $300 billion over a decade, almost all of which Obama says would go toward new public works projects.

Under current law, those profits are subject to federal taxes only if they are returned, or repatriated, to the US, where they face a top rate of 35%. Many companies avoid US taxes on those earnings by simply leaving them overseas. 

Finally, the president also proposed a broad new tax on financial firms with more than $50 billion in assets, a proposal that is unlikely to advance in Congress but underscores Wall Street’s continued status as a political punching bag.

The White House said the new tax would discourage excessive leverage, or borrowing, by taxing the liabilities of about 100 big financial firms, including banks, asset managers, broker-dealers and other companies. It would raise an estimated $112 billion over 10 years to fund other priorities, such as tax breaks for middle-income workers.

The question is: Is any of this legal? The answer is: Not unless Congress approves it, which is highly unlikely. In a message to Congress that accompanied the budget release, Mr. Obama said his proposals were “practical, not partisan.”

The White House Office of Management & Budget admits that Obama’s new budget – even with all the proposed new taxes – would add apprx. $6 trillion to the national debt by 2025, pushing it above $24 trillion.

Many Republicans quickly dismissed Obama’s budget request and have started drafting their own blueprint that would seek to eliminate deficits entirely over the next 10 years and tackle the biggest drivers of government spending – Social Security and federal health programs. We’ll have to see how that goes. In any event, a big budget battle is looming.

Obama Wants To Shut Down the Trans-Alaska Pipeline

By now, most of us know about the Keystone XL Pipeline that would run from Canada to the Gulf Coast, a project that President Obama has repeatedly threatened to veto.  Congress is about to send such a bill to him.

What you may not know, but should, is that Obama has even bigger plans – he wants to shut down and dismantle the Trans-Alaska Pipeline that was built in 1973-1977 and stretches from northern Alaska some 800 miles to the Port of Valdez on the southern coast, with the capacity to move over two million barrels of oil per day.

What, you haven’t heard about this? That’s because most of the mainstream media is keeping a lid on this story. But this is a story you need to know about! I wrote about it in my BLOG last Thursday. Take a few minutes to read it.

This story underlines why it is useful to subscribe to my Blog on Thursdays, if you haven’t already. The Blog is free; we don’t share your e-mail address with anyone – ever. And you’ll get to see important information that does not appear in this E-Letter. So be sure to sign-up today!

Very best regards,

Gary D. Halbert

 

SPECIAL ARTICLES

Obama Budget: More Debt, More Spending (a must read)

Obama Proposes $4 Trillion Federal Budget For 2016

Obama’s record on taxing the rich

 


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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.

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