Sunday, February 22, 2009

The Obama Budget

The rollback of Bush tax cuts in 2011 is a bad idea, but taxing hedge fund earnings as ordinary income is a good idea. Both of these notions are in the Obama Budget plan that he will be unveiling this week. There is no reason for hedge fund carried interest to be taxed at long term capital gains rates. They should pay the same tax rates as anyone else, which means ordinary income tax rates. Here, Obama is definitely on the side of the angels. Obama, again, seems to be devouring his own since most of the hedge fund industry supported him over his opponent in the last election and now he is going to raise their taxes...I love it.

The problem that Obama's budget is going to have is that:

1) The president is underestimating the future costs of the military. Al Queda and other problems will not fold up their tents and retire to a peaceful oasis somewhere just because America elected a "rock star" as their president and banished mean ole George Bush to Texas. These guys (Osama's gang) mean business and before long Obama will see that they mean business. Then what? Similarly, the Taliban. Is he thinking they will fold their tents as well. This is a rough tough world we live in and Chicago Southside politics may not be the necessary training ground to handle the current problems that lurk out there. It isn't as simple as "bring the troops home from Iraq" thereby saving billions of dollars and the world moves peacefully forward, as Obama will soon discover. Those troops, and more, will soon need to be redeployed.

2) The president is underestimating the cost of his health insurance plans, since the government health plan advocates expect a cornucopio of health benefits which are not remotely affordable. Things are only affordable if someone has an incentive to restrain their personal demand for services. Under the Obama plan, no one has such an incentive. Ultimately the government will ration health services and many currently available health services will be prohibited as "not necessary" (but actually not desired by government bureaucrats for reasons of cost). But, in the short run, it will all seem easy. After all, think of all the money we will save by not having the huge costs of the insurance industry. Look what our thinking has done for the Post Office. Within a decade, it will probably cost five bucks to send a postcard from New York to Philadelphia!

3.) The president is over-estimating his future tax receipts. The president seems to think tax revenues are an ever increasing function of tax rates. At 90 percent rates, he thinks he will bring in twice the revenue of 45 percent rates. He'll find out. Higher rates will depress future tax revenues for the same reason that lower rates raise future tax revenues. If you have something that's going to get taxed, people figure out how to turn it into something else. Look at Bill and Hillary. They made $ 100 million in income in the years since Bill left office, but paid tax on only $ 30 million. They contributed $ 70 million to their favorite charity -- themselves. Now, that charity supports the Clintons in the style to which they have become accustomed. But don't blame the Clintons; anyone can do the same thing if they are rich enough. That's why Buffett, Feinstein, Bill Gates, John Kerry, Ted Kennedy, Barbara Boxer don't mind tax increases (should I mention Daschle and Geithner?)...they don't have to pay them. All of these folks have large charitable foundations set up for the sole purpose of avoiding taxes that ordinary folks have to pay and cannot avoid.

At least the president is suggesting the size of the national debt matters, even if his budget doesn't do much to control it.