Obama’s Deficit, Tax Plan “Flies in the Face of the Lessons of History”

U.S. President Barack Obama unveiled a $3.6 trillion deficit reduction plan on Monday that includes tax hikes for individuals making over $1 million in annual income.

A key principle behind the plan is that high-income individuals and corporations should pay more in taxes than they presently do in order for them to more equitably participate in the burden sharing commensurate with the nation’s debt reduction efforts.

In comments this morning, Obama threatened to veto any debt-reduction legislation that excludes higher taxes on the wealthy and lowers entitlement benefits.  ”I will not support any plan that puts all the burden on ordinary Americans,” he contended.

In total, the White House estimated that Obama’s plan would lower debt to 73% of the size of the economy by 2021, far below the approximately 91% it is on pace to reach without any alterations to the budget.  In addition, the Obama administration projected that the annual deficit would fall to 2.3% of GDP by 2021, down from the present estimate of 5.5%.

The plan has already drawn significant criticism from many Republicans, who have remained steadfast in not wanting to raise any taxes given the risks of a renewed recession in the U.S.

Art Cashin, director of floor operations for UBS Financial Services at the New York Stock Exchange (NYSE), echoed this sentiment is his daily market commentary entitled Cashin’s Comments, presented below:

The Millionaire’s Tax – Three Observations - The expected proposal by the President to tax annual income above a million dollars may be too cute by half. It clearly looks like a “populist” initiative and clever political maneuver. By setting the threshold at $1,000,000 it boxes out almost all the Republican allusions to small business entrepreneurs and hits a number associated with wealth in popular culture (“So You Want To Be A Millionaire”, etc).

But, it looks so much like an “in your face” political challenge to his opponents, that may have evaporated all that talk about “constructive compromise” that popped up after the disgraceful debt ceiling debate. Markets sold off after the debt debate on fears that if a real national crisis were to erupt, both parties would continue to posture in partisan acrimony as the situation worsened. We’ll see if the new tax proposal re-ignites those fears.

Secondly, the tax proposal is being dubbed the Buffett tax since Mr. Buffett has long proclaimed that it is unfair and embarrassing that he pays taxes at a lower rate than his secretary. That could be instantly remedied by Mr. Buffett (or one of his accountants) by listing his income as ordinary income on his 1040A. Then he would be taxed at a rate equal to, or, more likely, higher than his hard working assistant.

Third, the proposal flies in the face of the lessons of history. According to the Tax Foundation, after the 1929 crash, Congress proceeded to raise the top marginal tax rate from 25% to 63% by the end of Hoover’s term (hat tip to the sharpeyed Mike Higley’s “By the Numbers”). As you may recall, hiking those rates may have made folks feel that rates were more equitable but it sure didn’t help the economy. Just a few thoughts.