Obama’s plans for taxes and spending

Here is the portion of Barack Obama’s Acceptance Speech at the Democratic National Convention that deals with taxes:

“Change means a tax code that doesn't reward the lobbyists who wrote it, but the American workers and small businesses who deserve it.

You know, unlike John McCain, I will stop giving tax breaks to companies that ship jobs overseas, and I will start giving them to companies that create good jobs right here in America.

I'll eliminate capital gains taxes for the small businesses and start-ups that will create the high-wage, high-tech jobs of tomorrow.

I will -- listen now -- I will cut taxes -- cut taxes -- for 95 percent of all working families, because, in an economy like this, the last thing we should do is raise taxes on the middle class.”

Here are portions of the speech that deal with spending:

“And for the sake of our economy, our security, and the future of our planet, I will set a clear goal as president: In 10 years, we will finally end our dependence on oil from the Middle East.

And I'll invest $150 billion over the next decade in affordable, renewable sources of energy -- wind power, and solar power, and the next generation of biofuels -- an investment that will lead to new industries and 5 million new jobs that pay well and can't be outsourced.
...
I'll help our auto companies re-tool, so that the fuel-efficient cars of the future are built right here in America.

I'll make it easier for the American people to afford these new cars.

And I'll invest 150 billion dollars over the next decade in affordable, renewable sources of energy-- wind power and solar power and the next generation of biofuels....

I'll invest in early childhood education.

I'll recruit an army of new teachers, and pay them higher salaries and give them more support....

Now is the time to finally keep the promise of affordable, accessible health care for every single American. If you have health care, my plan will lower your premiums. If you don't, you'll be able to get the same kind of coverage that members of Congress give themselves...

Now is the time to help families with paid sick days and better family leave....”

And, finally, here is the portion of the speech were he tells us how he is going to pay for all this spending:

“Now, many of these plans will cost money, which is why I've laid out how I'll pay for every dime-- by closing corporate loopholes and tax havens that don't help America grow.

But I will also go through the federal budget, line by line, eliminating programs that no longer work and making the ones we do need work better and cost less-- because we cannot meet twenty-first century challenges with a twentieth century bureaucracy.”

From Barack Obama, “Acceptance Speech at the Democratic National Convention” (Denver, Colorado, 28 August 2008).


Barack Obama’s economic program may be summarized as follows: “I” will cut taxes for small businesses and 95 per cent of working families, and “I” will spend on energy, education, and health care. To pay for it all “I” will raise taxes on corporations and eliminate waste and overlap in the Federal budget. It is churlish to note, but will anyway, that Obama will do no such thing because in a representative government he personally does not have the budgetary power to do anything without the consent of the Congress, and he certainly is not going to “pay for every dime” of this spending out of his own pocket. In the end, it is “You” that will pay, not him.

In other speeches Obama has pushed for a major expansion of health care, emphasizing the coverage of children; a new national infrastructure fund; substantial energy and education initiatives; and a doubling of foreign aid. In addition to increases in corporate taxes, he proposes paying for these programs by eliminating the cap on payroll taxes and ending the war in Iraq. These proposals would increase deficit spending by well more than $100 billion a year – this on top of what is already a huge and growing budget deficit.

With regard to Obama’s first source of finance mentioned in his Acceptance Speech, corporate profits, Obama is telling us two things: First, he thinks corporate profits are now being misused and should be spent on the priorities he listed above; and Second, he thinks corporate profits could contribute significantly to paying for the proposals he has put forward.

Let’s look at corporate profits to see how they are being used and how much they much they contribute to the government’s coffers. Here are the figures from the Federal Reserve for 2007, relating to domestic, non-farm, nonfinancial corporate profits:

Total: $1,037 billion

Of which:
Corporate profit taxes: $310 billion
Retained earnings: $240 billion
Corporate dividends: $487 billion

Here is how corporate profits were used in 2007: Of the just over $1 trillion in gross profits the government took 30 per cent in taxes off the top. Some $240 billion in retained earnings were re-invested by the corporations in their businesses and, along with corporate borrowing, helped finance capital formation, that is, were used to purchase equipment and machinery, factories and buildings, and other physical capital needed by these businesses. Presumably, Obama does not want to reduce investment and therefore would not tax this portion of profits.

The remaining $487 billion were distributed to shareholders in the form of Corporate dividends. Since dividends are taxed directly as income to shareholders, they must pay income tax on it. Taxes on the dividends will probably take 30 per cent or so of the $487 billion, leaving an after-tax net of about $337 billion to the owners of the corporations. Unless Obama proposes to take all the dividends from all American investors in all the stock markets here and abroad, there is not anywhere near enough money to finance his proposed expenditures and eliminate the deficit. Any further taxation of corporate profits, it should be noted, runs the risk of discouraging investment by corporations and hence the overall health of the economy. More importantly, the pensions and retirement incomes of millions of Americans depends on corporate profits and any reduction in payouts caused by higher taxes will impact them negatively.

In short, there is not much in the way of revenue the government can get by squeezing corporations and their shareholders more than the government already does. This is true for McCain as well as Obama.

With regard to Obama’s second source of finance, I am all for “eliminating programs that no longer work and making the ones we do need work better and cost less”. Here he is telling us he will be the first person in American history to make a significant reduction in a government program. An somehow he will make an institution designed for inefficiency efficient, when no one else has ever been able to do so. And these reductions must lead to many tens of billions of dollars of saving to be a significant help in financing his proposals.

It is difficult to conclude that the economics of Obama’s Acceptance Speech is anything more than a dream.

Thanks to the Econbrower blog for the pointer and ideas of this Tdj.