Obama's Scary Hoover-Style Tax Hikes

Mon, 02 Mar 2009 22:17:31 +0000 – By Phil KerpenDirector of Policy, Americans for Prosperity

The composition of the tax hikes in the 2010 budget is frighteningly similar to the Revenue Act of 1932, the much-maligned Hoover tax hikes that put the "Great" in Great Depression by putting an enormous tax burden on millions of Americans, largely through excise taxes. These taxes, raised even further by FDR, were justified by the promise that the funds would be returned in the form of relief programs, which is to say that some portion of the tax revenue, after administrative costs in Washington, would go back to the states with strings attached, often to further political rather than economic objectives.

As the table below shows, the Obama budget blueprint, like the 1932 act, is split mainly between broad excise taxes and income tax hikes on high income earners. Unfortunately, there were no 10-years projections back then, so I had to use one year numbers, but it's still an interesting comparison.

[caption id="attachment_8204" align="aligncenter" width="621" caption="Courtesy Phil Kerpen"][/caption]

The 2010 budget assumes, probably correctly, that the only way to generate a big revenue increase in the face of severe economic weakness is to use a tax mechanism--the excise tax--that is collected in relatively small increments across millions of transactions made by Americans of all income levels. That is a direct lesson of 1932, when the income tax on the rich--then the only people who paid income taxes--was raised to capture as much revenue as possible before high-income earners fled the country or stopped working. Then, as now, that amount was about 0.3 percent of GDP.

Excise taxes did most of the revenue work in the 1932 act, including excises on everything from trucks, tires, jewelry, chewing gum, and soft drinks to gasoline and electricity. Those last two are especially interesting in light of the carbon cap-and-trade proposal in the 2010 budget, which is a de facto excise tax on those items as well as every other energy technology that relies on the most affordable energy sources: natural gas, oil, and coal.

Despite President Obama's promise that "If your family earns less than $250,000 a year, you will not see your taxes increase a single dime. I repeat: not one single dime," his new budget raises 45 percent of its revenue from energy taxes that will be paid by everyone who fills a gas tank, pays an electric bill, or buys anything that was grown, shipped, or manufactured.

While the overall tax hike is smaller than 1932 (0.9 percent of GDP versus 1.6 percent of GDP) and the excise/energy component is only half the size (0.4 percent of GDP versus 0.8 percent of GDP) there is every reason to believe that the bite of the cap-and-trade tax will increase considerably beyond the initial projections, making this plan even more resemble 1932.

The cap-and-trade provisions are designed to get much, much more expensive over time, making the total impact hard to quantify but likely to be as or more expensive than the 1932 Revenue Act. In fact, Obama's version of cap-and-trade is much more expensive than last year's already outrageous Lieberman-Warner bill, mandating emissions cuts of 83 percent versus 63 percent in last year's version.

I didn't include the death tax in the chart, because there was no revenue estimate for it in 1932, but that's another eerie parallel. In 1932 the rate was hiked from 20 percent to 45 percent, and in 2010, under Obama's proposal (which is hidden in a footnote in the budget) it will go from zero under current law to that same 45 percent rate.

If we continue down a path of repeating the policies of the 1930s we risk a repeat of the same results. Let's hope Congress has the good sense to say no to these Hoover-style tax hikes.

Phil Kerpen is director of policy for Americans for Prosperity.