March continued the string of dismal employment reports from the
Bureau of Labor Statistics. The unemployment rate increased by
another 0.4 of a percentage point to 8.5 percent. The payroll
survey reported that non-farm employment fell by 663,000 jobs,
roughly in line with expectations. These discouraging economic
figures should prompt Congress to pause before passing a
tax-and-spend budget such as the one President Obama proposed. This
is precisely the wrong time to burden the economy with higher taxes
and additional wasteful government spending.
Job losses were deep and widespread in March, with every sector
besides health care shedding jobs. The unemployment rate climbed to
8.5 percent, the highest level since 1983. The current economic
downturn is severe, and its magnitude thus far is similar to the
1981-82 recession. If these similarities hold true, unemployment
will continue to climb and even peak months after the recession has
ended, as it did in the early 1980s when the unemployment rate
reached its high of 10.8 percent after the recession was officially
The unemployment rate increased despite 339,000 workers leaving
the labor force. The unemployment rate climbed for almost all
categories of workers, including of sex, race, and education. Male
workers over 20 have an unemployment rate of 8.8 percent, compared
to 7.0 percent for women over 20. Teenagers have an unemployment
rate of 21.7 percent. The one exception to this almost universal
increase was African American workers, whose unemployment rate fell
by a statistically insignificant 0.1 of a percentage point.
Job losses hit less-skilled workers particularly hard in March.
The unemployment rate for workers with at least some college
education rose by 0.2 of a percentage point, while the rate for
workers with a high school degree or less increased by 0.7 of a
percentage point. Workers with a bachelor's degree or higher
continue to have the lowest unemployment rate at 4.3 percent, while
high school dropouts have the highest at 13.3 percent.
Job losses in the service industry (-358,000) constituted over
half the total amount of job losses. Construction (-126,000) and
manufacturing (-161,000) continued to reduce employment. Only
health care (14,000) added jobs while professional business
services (-133,000) continued its sharp decline. Over half
(-72,000) of those professional and business service job losses
came from temporary help services.
No Time for Tax and Spend
These discouraging numbers underscore that Congress should not
embark on an anti-growth taxing and spending frenzy. Unfortunately
President Obama's budget currently before Congress would do just
that, increasing spending by more than $1,000,000,000,000--one
trillion dollars--over the next decade. Government spending does
little to help the economy because, in the budgeting process,
political concerns trump economic merit.
For instance, consider this week's announcement of another
Detroit automaker bailout: Taxpayers will be spending billions of
dollars to give GM and Chrysler another two months to come up with
a turnaround plan after the Obama task force rejected their
original plans as laughable. Even the Obama team expects GM and
Chrysler to go into bankruptcy court, but rather than force them to
do so immediately, Obama gave these companies an additional several
billion dollars. That money will further weaken the economy by
allowing GM and Chrysler to delay taking necessary and inevitable
actions, including bankruptcy.
Obama's budget also outlines devastating tax increases that
would permanently weaken the economy. Tax increases are wrongheaded
under any condition, but to suggest them as the domestic economy is
contracting as part of the Global Great Recession signals (at best)
an extraordinary indifference to current economic conditions.
In total, over 10 years President Obama proposes $593 billion in
tax relief and $1,961 billion in gross tax increases for a net tax
increase of $1,368 billion. The budget envisions the enactment of a
cap-and-trade policy effective by 2012 to address climate concerns.
As portrayed in the budget, this policy raises about $80 billion a
year through 2019. However, the footnote to the table indicates
that significant additional amounts are expected to be raised as
the policy is further defined.
Obama proposes to raise taxes significantly on upper-income
families and small businesses by raising income tax rates on
ordinary income, increasing tax rates on dividends and capital
gains, preserving the death tax at onerous levels, restoring the
previous phase-outs of the itemized deduction and personal
exemptions, and creating a new cap on the rate at which individuals
can deduct itemized deductions.
The Obama budget does include a few beneficial tax provisions
among its many harmful proposals. For example, it includes a small
but notable proposal to eliminate entirely the capital gains tax on
small businesses. This provision would make it easier for
prospering small businesses to raise equity capital to hire more
workers and reach more markets. The budget also includes an
important proposal to adopt automatic enrollment in IRAs and
401(k)s to expand private saving.
Miscellaneous tax increases fill Obama's budget. It reinstates
the now-long-lapsed excises on manufacturers to finance the
Superfund toxic waste cleanup program. This trust fund already has
sufficient resources to finance its operations for many years, so a
reinstatement of the tax largely on manufacturing concerns is
unnecessary. Repealing an inventory accounting rule known as "last
in, first out" would raise taxes on businesses that need to carry
significant amounts of inventory. There is no policy justification
for this proposal other than as a convenient means of raising taxes
on businesses. These are just two of the more notable examples of
the many miscellaneous proposed tax hikes in President Obama's
No Time to Threaten Radical
Restructuring and Tax Hikes
The U.S. economy slid from a mild recession (December 2007
through August 2008) into the current deep and rapid contraction
that threatens to persist through 2009. Asia and Europe have also
fallen into deep recessions expected to continue into 2010.
President Obama and the Democratic Congress responded to news of
a trillion-dollar-plus budget deficit in 2009 with a massive
ill-labeled stimulus bill. In addition, the Treasury and the
Federal Reserve are employing a multitude of programs to restore
financial markets to normal operations and begin to lay a
foundation for economic recovery. This is the economic background
against which President Obama has proposed to jack up tax rates on
Higher taxes on small businesses, higher taxes on investment
capital, and a massive new tax regime to finance a risky new
program to drive up energy costs and restructure much of the
economy according to federal government designs are all policies
that would weaken the economy under any circumstances. It is
extraordinarily harmful and ill-advised to propose such policies
under the present economic conditions.
A Better Change in Course for Tax
The March employment report shows an economy continuing to slide
deeper into recession. In response to these worsening conditions,
President Obama is proposing to raise taxes and expand government
spending. No people have ever taxed themselves into prosperity.
Additional government spending will do little to help the economy
because political considerations--not economic merit--will dictate
how the money gets spent. The net effect of these proposals would
- Much higher levels of taxation;
- A much weaker economy; and
- American families with much less of their own money to
A wiser course would be to jettison the tax hikes, including the
jobs-destroying climate change initiative, and focus on policies
that strengthen the economy such as cutting spending and cutting
James Sherk is the Bradley Fellow in Labor
Policy, and J.
D. Foster, Ph.D., is the Norman B. Ture Senior Fellow in the
Economics of Fiscal Policy, at The Heritage Foundation.
These figures are measured against a current
policy baseline, which projects revenues over the budget window
assuming all current tax policies are continued. Thus, a tax
provision like the R&D tax credit, which typically expires each
year and is extended each year, is carried in the baseline forecast
as though it were permanent. This baseline issue is discussed