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Wednesday, January 7, 2009

Obama's $800 Billion "Bridge to Nowhere"

Change we can believe in? For those who believed that “change” was coming to Washington, the details of Obama’s economic stimulus plan will be very disappointing. It turns out that “Obamanomics” is nothing more than a continuance of the failed economic policies of the past. What a surprise! Does the President-elect know that the change from “tax and spend” to “tax cut and spend” has been the type of “change” that the Bush Administration enacted? All throughout the campaign, Obama pledged not to continue the “failed policies of George W. Bush.” Now, he’s stealing a page right out of Bush’s fiscal policy. Let’s go through the details…

We’ll begin with the tax proposals. Obama’s plan includes the following: On the individual side, he proposes a $500 individual tax credit ($1,000 for couples). On the business side, the proposal consists of an extension of the Net Operating Loss (NOL) carryback feature to 5 years (currently 2 years), tax credits to businesses that create jobs or avoid layoffs, increasing the amount that allows small businesses to write off a wide range of expenditures up to $250,000 (currently $175,000) and doubling the renewable energy tax credit.

Fiscal conservatives understand that tax cuts only work when they are coupled with spending restraints – not when they are used as an inducement to win bipartisan support. Speaking of inducement; when the tax code is used to encourage behavior, the result is never what was intended.

The problem with Obama’s individual tax credits is 1) checks of this nature were part of the Bush plan in early 2008, which failed to “stimulate” the economy; and 2) if this credit is made a permanent part of the tax code, many of the recipients are people who already have no federal income tax liability which basically makes it a form of welfare.

On the business side, there is a catch to the NOL carryback feature. Write-offs are retroactive to expenditures made as of January 1, 2009. In other words, businesses have to invest the money in order to receive the credit. The problem with giving tax credits to businesses that hire or avoid layoffs is that businesses who were already planning on hiring will be the only ones to benefit from the credit. Troubled businesses that are forced to let workers go will not be saved by a small tax credit. Chalk this up to Obama’s lack of private sector experience. Apparently, he hasn’t looked into the costs of TOTAL compensation for a worker.

Many of these tax credits are nothing more than extensions of the credits already enacted by the Bush Administration, yet we were led to believe that John McCain was Bush’s third term! In all seriousness, it is most unfortunate that the Obama Administration will not play the card that the Bush Administration missed – addressing the fact that the United States has the SECOND HIGHEST corporate income tax rate in the world. Instead of playing games with tax credits that have ridiculous stipulations, reducing the corporate income tax rate would bring relief to ALL sectors of business while simultaneously encouraging business to come back to the United States. More businesses in the United States leads to job opportunities and will curtail jobs being lost to tax-friendly overseas environments. In addition, businesses would have fresh capital to grow and expand.

Moving on to the spending side of this turkey….

Most of the spending in Obama’s plan is nothing more than welfare to individual states. Up to $200 billion is being proposed to expand the federal share of Medicaid which makes one wonder exactly how that will stimulate the economy. A majority of the remainder will be used to spur the growth of federal infrastructure spending. When was the last time infrastructure spending has pulled the economy out of recession? Another problem with infrastructure spending is that the money is rarely spent on what it was intended. When money of this nature is allocated to states, it’s time for politicians to become famous. It’s time for a new community center or a face lift for a school. There is no political publicity in road and bridge repair. Besides, if they actually were fixed, then it removes politicians’ ability to complain that there is a lack of funding! Lastly, infrastructure spending does not happen immediately as there are numerous federal mandates (government red tape) that require strict compliance. It is very likely that the economy could be in an inflationary expansion period by the time the spending proposals take effect.

In short, the Obama plan grossly misses the mark. In addition, the $800 billion price tag is abhorrently understated. Obama’s plan will end up well over the $1 trillion mark if Congress approves. Reckless government spending at time where our national debt is creeping up to 70 percent of our gross domestic product can make the last bout of inflation look mild. Let's not forget that "crisis" is a friend of the state. The scare tactics being used as a means to inject billions of dollars of "artificial" money into the economy will only pave the road for bigger problems in the future.

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