President Obama released his proposed budget recently and had his surrogates on the cable talk shows attempting to sell it to the American people. One recurring theme repeated over and over again by his pitchmen is that taxes will be raised only on the wealthy, those earning more than $250,000 per year. While I would argue tax increases of any kind are a bad idea given the state of the economy, I want to spend some time investigating the mammoth tax increase that’s hidden in the proposed budget for all Americans regardless of income level.
In short, if Obama’s budget passes as is, every American will experience a significant tax increase and see the level of their spendable income (leftover after taxes) decline which spells bad news for an economy that’s already punch drunk from massive deflationary deleveraging.
What hidden tax is this?
The ‘cap and trade’ program for carbon emissions.
(Source for the information in the following paragraph from John Mauldin’s
‘Thoughts from the Frontline’ March 6, 2009)
This program is expected to generate revenues for the Federal Government of $79 billion in 2012, $237 billion by 2014, and $646 billion by 2019. This revenue will be paid to the government by utility companies.
Obama and his team are forgetting something very important – businesses don’t pay taxes. Oh sure, businesses file tax returns and write checks to the government for ‘their fair share’ but where does that money come from?
Their customers of course.
When the government mandates that energy (utility) companies pay the government a fee for the energy they use, the utility companies in turn raise prices on their customers. With the ultimate revenue raised by this ‘cap and trade’ program estimated to eventually reach 4% – 5% of gross domestic product – that’s a substantial number. (Source: Mauldin, March 6, 2009)
Gross Domestic Product or GDP is currently around $14 trillion annually. If the cap and trade program consumes $646 billion of that number, that’s substantial especially in an economy like the United States’ where economic health is largely dependent upon consumer spending.
According to the US Bureau of Economic Analysis, consumer spending still accounts for about 70% of Gross Domestic Product – so, if consumers aren’t spending, GDP drops far more quickly than in economies that aren’t as dependent on consumer spending.
Here’s where the Obama administration needs to be more straightforward – what will be the cost to GDP, our economy, and the ‘non-wealthy’ who use energy under the proposed ‘cap and trade’ program?
Let’s try to figure it out.
Assuming consumer spending is 70% of GDP and GDP is $14 trillion, then $9.8 trillion of GDP is related directly to consumers going out, opening their wallets and purses and spending the green stuff.
If that $9.8 trillion is reduced by the projected $646 billion that consumers will be paying unnecessarily in additional energy costs, it might be fair to assume that number directly reduces GDP. For those of you that think that the government can somehow make up for this shortfall, don’t ignore the harsh reality that the government doesn’t produce anything. Every penny spent on infrastructure is a penny the government doesn’t currently have – it’s simply a loan against future production, if not yours, your child’s or grandchild’s.
This new energy tax will be paid by anyone who uses energy. And, any dollar paid as a result of any tax, including this new proposed energy tax, is a dollar that a consumer can’t spend and that’s bad news for an economy like ours so dependent on consumer spending.
There is one other thing the Obama team’s not talking about. Rich folks don’t use energy at a disproportionately higher rate than poor folks – so in a round-about way (the preferred method of politicians), Obama like every tax raising politician before him, talks about tax increases only on the wealthy who can presumably afford it, while attempting to grab the wallets of the masses which is where all the money really is.
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