‘Fiscal cliff’ tax increases will slam U.S., CA

‘Fiscal cliff’ tax increases will slam U.S., CA

new year's tax increase, cagle, Jan. 2, 2013Jan. 2, 2013

By John Seiler

Congress and President Obama just worked out a deal for massive tax increases that will slam Californians. The federal tax hikes hit even the middle class, whose payroll taxes will rise 2 percentage points.

The federal wallop comes on top of the $6 billion of Proposition 30 tax increases voters passed two months ago. The tax increases almost certainly will spark a new recession and increase unemployment.

Gov. Jerry Brown campaigned for his tax increase by appealing to envy. He insisted that the rich must “pay their fair share.” That never was defined. Is it half of income? Or 75 percent, as in France? Why not 100 percent?

And he didn’t care that federal taxes likely would go up, as indeed has happened.

Including the Obamacare and other tax increases, the top federal rate personal tax rate rises from 35 percent to 41 percent.

Add the new top California personal tax income tax rate of 13.5 percent, and the combined top rate here now comes in at 54.5 percent.

However, by moving to Nevada, Texas, Washington, Florida or another state with no state income tax, that rate drops to 41 percent (the federal rate alone), or a 25 percent decline. Plus other taxes would be lower. And real estate is a lot cheaper. Of course, California’s balmy climate also would be gone. But as the Rolling Stones scream on their 50th anniversary tour, “You Can’t Always Get What You Want.”

The Obama-Boehner “fiscal cliff” tax increases could sabotage Brown’s budget plans. In a few days the governor will release his new budget for fiscal 2013-14, which begins on July 1. It will project a strong, growing economy that will bring in oodles of new revenue, in particular from Prop. 30.

But tax increases usually bring economic decline.

Clinton’s 1993 tax increase

Before I cite some examples of decline, let me deal with the tax increase Democrats always bring up: Bill Clinton’s from 1993. The recent “fiscal cliff” tax increases were touted by Democrats as bringing back the top 39.6 percent rate Clinton and the Democratic Congress of 1993 imposed, a rise from 35 percent in 1992. That supposedly supplied the oomph in the economic growth for the rest of the 1990s.

President George H.W. Bush’s 1990 tax increase broke his “Read my lips, no new taxes!” solemn pledge he made at the 1988 GOP national convention. It helped get him elected over Michael Dukakis. The tax increase slammed the country into a recession that led to Bush losing to Clinton in 1993.

Tax policy sends messages. In this case, the message was: “All is hopeless. Not just Democrats, but Republicans favor tax increases. There’s no brake on looting the economy. Get out while you can.”

The 1993 Clinton tax increase was different. The key was this: It passed by just one vote in the U.S. Senate and one vote in the House of Representatives. The message was: “Even Democrats are reluctant to raise taxes, so there aren’t going to be any more. Get back to work making money.”

And that’s just what happened. We haven’t had any major federal tax increases until now.

But notice also what happened after the 1993 Clinton tax increase. In 1994, Democrats lost control of Congress. Republicans were in charge of both houses for the first time in 30 years. Message: “No way are taxes going up.”

Then, in 1996, Clinton agreed with the Republican-run Congress on a tax cut, dropping the top capital gains tax rate from 28 percent to 20 percent. That freed more capital to help fuel the dot-com boom of the late 1990s. Message: “Even a Democratic president wants tax cuts and jobs growth.”

Clinton was a master politician (still is). He actually followed his 1992 campaign slogan, “We must have the courage to change.” In his case, he dumped worn-out Democratic obsessions with envy and tax increases, supported tax cuts and was re-elected in 1996, beating Bob “Tax Collector for the Welfare State” Dole.

Tax increases

Now let’s look at the tax increases that have caused recessions.

In 1968, President Lyndon Johnson imposed a 10 percent income surtax to pay for the Vietnam War and his Great Society welfare programs — his “guns and butter” policy. The result: the 1969-70 recession.

In 1971, President Nixon imposed his infamous “Nixon Shock,” which raised taxes and tariffs and took America off the gold standard. The resulting inflation boosted the economy artificially through 1972, helping Nixon run up a 49-state landslide in the 1972 election. Then a deep recession hit in from 1973-75.

This began the the “stagflation” economy of the 1970s: stagnation plus inflation. Robust recovery began only when Ronald Reagan’s tax cuts dug in with full force in 1983. (Although the tax cuts were enacted in 1981, Reagan later admitted he made a mistake by delaying some of the cuts for two years, which also delayed the recovery.)

Reagan did increase some taxes. But overall, he dropped the top income tax rate from 70 percent to 28 percent by 1986, a major accomplishment.

The Reagan Prosperity ended with the 1990 Bush tax increases, discussed earlier in this article. In California, the Bush recession was made worse by Gov. Pete Wilson increasing taxes $7 billion a year in 1991. Doing so, instead of increasing state revenues, actually decreased them by $2 billion to $40 billion a year. Economic recovery here was delayed until the taxes ended in 1995.

The early 2000s recession probably was caused not by direct tax increases, but by the Federal Reserve Board of Alan Greenspan imposing deflation, as Jude Wanniski described it at the time. That didn’t last long, as the Fed under Greenspan inflated the dollar after 9/11.

The 2007 recession and 2008 economic collapse were caused by tax increases only in the sense that the 2001 and 2003 Bush tax cuts were not permanent, causing uncertainty in the late 2000s. Other factors were larger, including new Fed Chairman Ben Bernake continuing Greenspan’s inflationary policies. Those policies included ultra-low interest rates which, along with too-easy lending rules, caused the housing boom-bust.

The ‘message’ of tax increases 2013

Will the new tax increases be different? Will they continue prosperity instead of sparking a new recession?

Let’s return to the important concept of how polices send “messages.” The message now is: “The Republican leadership, and many GOP senators and representatives, think tax increases are OK. The Republicans no longer have the guts to stand up to the demands for tax increases by Obama and other Democrats. So even more tax increases are likely.”

In California, the “message” is: “Voters just passed two tax-increase initiatives and put supermajorities in charge of both houses of the Legislature. There is no brake on taxing and spending except Brown, who pushed through the tax increases. And if he vetoes a tax increase, the supermajority could override him.”

At both the federal and state level, the “message” is that the appeal to envy works. The call for the “rich to pay their fair share” resonated.

But “the rich” are the entrepreneurs and business owners and jobs creators. Take more money from them, and they have less to invest in business and jobs creation. To avoid paying their unfair share — and in many cases just to survive — “the rich” will leave California and even the United States.

Many of “the rich” are family businesses that now could pay the increased death tax. Which means that when the older generation dies, the younger generation will have to sell the company to pay the death tax, destroying the family ownership that is essential to the success of many such companies.

Within the next few months we’ll see how hard the tax increases have sapped the economy. If history is any guide, it’s going to be bad. The reduced economic activity could end up reducing revenues to all levels of government, ironically making the fiscal and debt crises worse.

27 comments

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  1. Douglas
    Douglas 2 January, 2013, 13:07

    Ceteris paribus

    Reply this comment
  2. Ted Steele, Navigator
    Ted Steele, Navigator 2 January, 2013, 13:12

    All I can say is thank God we have a great President. I wish more moderate Repubs like Boenher were truly controling their party– we’d be able to get some progress on the deficit and the debt!

    Reply this comment
  3. Tax Target
    Tax Target 2 January, 2013, 14:28

    @Steele… really???? The only progress you will ever see at the hands of this “great” (duh-really?) president is an expansion of the deficit and the debt. Wake up and smell the roses!

    Reply this comment
  4. us citizen
    us citizen 2 January, 2013, 14:38

    Ted is dreaming again.
    Ted, did you ever think………..stop the spending, instead of up the taxes

    Reply this comment
  5. Ted Steele, Navigator
    Ted Steele, Navigator 2 January, 2013, 15:31

    I agree fellas! The cuts are coming— but their must be balance!

    Long live the recovery!

    Reply this comment
  6. Ted Steele, Navigator
    Ted Steele, Navigator 2 January, 2013, 16:12

    Imagine if all the tumult of the body were to quiet down, along with our busy thoughts. Imagine if all things that are perishable grew still. And imagine if that moment were to go on and on, leaving behind all other sights and sounds but this one vision which ravishes and absorbs and fixes the beholder in joy, so that the rest of eternal life were like that moment of illumination which leaves us breathless.
    – Saint Augustine

    Think about it lads!

    Reply this comment
  7. NTHEOC
    NTHEOC 2 January, 2013, 16:23

    Tax Target says:
    January 2, 2013 at 2:28 pm
    @Steele… really???? The only progress you will ever see at the hands of this “great” (duh-really?) president is an expansion of the deficit and the debt.
    =================================
    That Obama inherited!! In his drunken stupor,Bush left this country in shambles!! Ted is right, thank goodness we have a president that has been doing all he can to fix the problem. Ok let it rip now TEABAGGERS.

    Reply this comment
  8. jimmydeeoc
    jimmydeeoc 2 January, 2013, 16:46

    I see wisdom has not visited NTHEOC or Teddy upon arrival of the new year.

    We know you’re just trolling, but seriously guys….

    Yes, Obama inherited a bad hand…….and proceeded to double-down.

    Does ANYONE really think things are going to be better 2 or 3 years from now?

    Reply this comment
  9. Rex the Wonder Dog!
    Rex the Wonder Dog! 2 January, 2013, 17:28

    I see wisdom has not visited NTHEOC or Teddy upon arrival of the new year.

    These two are GED educated gov employees, wisdom NEVER visited them 🙂

    But comedy sure did!

    Reply this comment
  10. us citizen
    us citizen 2 January, 2013, 17:57

    Great responses to the NTHEOC and Steele
    I was just going to call them oblivious and naive but why even bother. There are times when there is just absolutely no hope for the insane.

    Reply this comment
  11. NTHEOC
    NTHEOC 2 January, 2013, 18:12

    Rex the Wonder Dog! says:
    January 2, 2013 at 5:28 pm
    I see wisdom has not visited NTHEOC or Teddy upon arrival of the new year.
    These two are GED educated gov employees, wisdom NEVER visited them 🙂
    But comedy sure did!
    ======================
    LOL….Will you ever stop with the GED rex!! Again, My paycheck shows the 5% increase for my degree.HAH!!

    Reply this comment
  12. NTHEOC
    NTHEOC 2 January, 2013, 18:17

    jimmydeeoc says:
    January 2, 2013 at 4:46 pm
    I see wisdom has not visited NTHEOC or Teddy upon arrival of the new year.
    ======================
    Oh tell us old WISE one, We are all doomed!!!

    Does ANYONE really think things are going to be better 2 or 3 years from now?
    ======================
    Maybe not for you!! So sad…….

    Reply this comment
  13. Dyspeptic
    Dyspeptic 2 January, 2013, 18:50

    Teddy Steal said “I wish more moderate Repubs like Boenher were truly controling their party– we’d be able to get some progress on the deficit and the debt!”

    Teddy are you completely non compos mentis? The Dear Leader doesn’t give a rats behind about the national debt or the deficit (and neither do the Republicans). If he did, he wouldn’t have run up $6 trillion in deficit spending in a mere four years. Also he wouldn’t have produced a 2012 budget that the CBO scored as increasing the national debt by another $2.7 trillion over 10 years. And, he wouldn’t have pushed through his disastrous health care scheme which the CBO now projects will increase budget deficits by $1.9 trillion over 10 years.

    If you paid any attention to the advice Obummer gets from his Keynesian advisers and fan-boys like Paul Krugman, Brad DeLong, Alan Blinder and James Galbraith you would know that the eggheads who provide intellectual cover for your party don’t care about the deficit because “We only owe it to ourselves”. Obummer just wants to use deficits as a weapon to raise taxes and has no plan to reduce spending at all. Ever.

    So please get your lips off of The Child Killer In Chief’s butt (David Gregory, Piers Morgan and Chris Matthews want their turn) and try to get some oxygen to your atrophied brain.

    Reply this comment
  14. Hondo
    Hondo 2 January, 2013, 20:51

    I hope the tax increases work. Being as poor as I am, I could use some of George Soros’s money. 25k will do, George. I need some crowns on my teeth.
    I hope my fine liberal friends here are right and the economy gets bigger. And the unemployment rate falls a lot. I am way under employed.
    If they fail to raise enough revenue, then heaven help those republicans in the house who voted to raise taxes 41 dollars for every dollar of spending cuts. I hear Bohner is going to step down as speaker tomorrow. Perhaps he is switching sides to vote for Pelosi for speaker. The horrific debacle of the ‘super committee’ was the failure that led to this debacle. Both of these were pushed by the ‘ conservative’ leadership of the republicans. Those two actions were failures of epic proportions.
    I give credit to Harry Reid. He profoundly out manuvered and bitch slapped the republican leadership all over the country. Bohner profoundly wasted the Speaker ship he was given by the Tea party with the huge win in 2010. Never has such a huge win been so badly wasted in the history on our country.
    Conrats to the liberals.
    And watch out to any of those republicans who voted to raise taxes 41 dollars for every dollar of spending cuts. They may be canceling a lot of town hall meetings. They will be hearing it for the voters who thought they voted for a ‘conservative’.
    Hondo…

    Reply this comment
  15. SkippingDog
    SkippingDog 2 January, 2013, 21:47

    You told us you left the Golden State for the greener pastures of unregulated opportunity available in some other right to work state, Hondo. If you’re still so poor you can’t afford to see a dentist, perhaps you might need to rethink your approach.

    Reply this comment
  16. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 2 January, 2013, 21:51

    Dysphoric–Without the Limbaugh-Beckian cliches your content would be zero! Zzzzzzzzzzzz

    I wish I could say it was fun watching you clowns in your 3 corner hats soiling your pants and brand.

    Reply this comment
  17. BobA
    BobA 2 January, 2013, 21:56

    Hondo:

    As every president has learned starting with Ronald Reagan, when democrats promise spending cuts in return for tax increases, you get the tax increases but never the spending cuts. It’s a sure bet that another round of tax increases is coming just as soon as the noise dies down on the latest tax increases.

    Plus the full brunt of the new Obamacare taxes will hit in 2014. By mid 2016, the acknowledged US debt will exceed $22 trillion dollars which means we should be well into hyper-stagflation by then.

    Unbeknownst to most low information Americans, then Chinese, the Russians and other foreign countries are quietly reducing their US treasury bond holdings. Germany is also quietly in the process of repatriating the gold bullion from the US back to Germany.

    Once the the US dollar loses it’s status as the world’s reserve currency, the US economy will collapse under the crushing weight of our debt as the US dollar becomes virtually worthless.

    Keep an eye towards the world’s currency exchange rates. Signs of the dollar’s impending collapse will been seen their first. The exchange rate I keep an eye on is the Canadian dollar vs the US dollar which is currently worth more than the US dollar. Another indicator is the yield on US bonds. The cue that something is awry is when the Feds start raising the interest rates by more than 25 basis points at a time.

    Reply this comment
  18. Rex the Wonder Dog!
    Rex the Wonder Dog! 2 January, 2013, 23:14

    I hope the tax increases work.

    LOL…we are going to be further behind the 8 ball when these so called temporary taxes are set to expire…and guess what they’re going to say 😉

    Reply this comment
  19. BobA
    BobA 3 January, 2013, 08:46

    Rex:

    When has tax increases ever worked? All it has ever done is give politicians more reasons and more money to spend and spend they will. Anyone who thinks otherwise has a 5th command of basic math and a juvenile view of reality.

    Reply this comment
  20. The Modified Ted Steele Methodologies (tm)
    The Modified Ted Steele Methodologies (tm) 3 January, 2013, 20:01

    When “have” tax increases ever worked.

    sheesh.

    Reply this comment
  21. Rex the Wonder Dog!
    Rex the Wonder Dog! 3 January, 2013, 23:19

    When “have” tax increases ever worked.
    ==
    NEVER, that’s when

    sheesh

    Reply this comment
  22. BobA
    BobA 4 January, 2013, 08:15

    Rex:

    No doubt that Ted’s math skills are woefully lacking. Nancy Pelosi must have been his math teacher.

    One potato two potato three potato four…. Ted never learned what comes after four.

    Reply this comment
  23. Rex the Wonder Dog!
    Rex the Wonder Dog! 4 January, 2013, 09:08

    Teddy, still trying to play with only a 20 card deck 😉

    Reply this comment
  24. Ted Steele, Navigator
    Ted Steele, Navigator 4 January, 2013, 16:05

    I live in his tiny head—lol———–it’s cozy!

    0 for 14 ™!

    Reply this comment
  25. Rex the Wonder Dog!
    Rex the Wonder Dog! 4 January, 2013, 22:00

    Teddy,- owned by the Rotti 😉

    Reply this comment
  26. Joel
    Joel 8 January, 2013, 18:11

    Uuum its called the inheritance tax, not the death tax. Bush referred to it as the death penalty. Pretty sure that is something different. But your rhetoric echoes that of our worst president ever-President Alfred E Newman, aka Junior or GWB.

    Reply this comment
  27. CalWatchdog
    CalWatchdog Author 8 January, 2013, 21:37

    Joel, I spent eight years criticizing GWB on almost everything. That he called the death tax the “death penalty” was his mistake, not mine. And it is a death tax because you pay it when you die, depriving your heirs of your hard-earned efforts to enrich the robbers in government.

    — John Seiler

    Reply this comment

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