Obama, Tax Hikes, Foreclosures and Downward Spirals

During the 2008 campaign, Obama claimed that the rich didn’t “need” the Bush tax cuts. Despite an economy that hasn’t responded to his record deficit spending – otherwise known as the “stimulus” – Obama and his talking heads still oppose maintaining the Bush cuts. Any such opposition, however, is rooted far more in demagoguery than in economics. In truth, the coming tax hikes will hurt the economy in many ways, including exacerbating the foreclosure crisis and ensuring a bad economy for years on end.

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Of course, it has long been the strategy of the Democrats to engage in class warfare when it comes to tax cuts. Obama’s belief that the Bush tax cuts were for people who “don’t need them and didn’t even ask for them,” is just the latest incarnation of that tired theme. In today’s economy, which features an ongoing foreclosure crisis unlike any other over the last 40 years, nothing could be further from the truth.

Common sense thinkers, including Reagan, JFK and Keynes, well know that lower tax rates lead to greater incentives and greater economic activity and therefore greater tax revenues over time. Tax increases, on the other hand, reduce incentives and economic activity and therefore result in less tax revenue. During a bad economy like today, the latter effect can be accelerated and the current foreclosure crisis is a dangerous case in point.

Consider, if you will, Contra Costa County, California, which is some 30 miles east of San Francisco. Most would consider it a well to do area. Indeed, by the numbers, those living in Contra Costa have the 5th highest per capita income of all California counties and 45th in the nation. To be sure, among the over one million residents of Contra Costa, there are many Contra Costans who Obama would consider “rich” – and therefore who don’t “need” the Bush tax cuts.

The economic problem with Obama’s view, however, is that an astounding 40% of the home mortgages in Contra Costa are either in foreclosure or exceed the value of the home. In other words, Contra Costa is truly a major county in economic distress. Since homes are the most significant asset for most people, that means that in this so-called “rich” area, a huge percentage of the population is in deep, deep economic trouble.

Obama, Pelosi and Reid are now set to raise taxes on many of those people because they don’t “need” the money. Obviously, they more than need it – they need additional after tax income to pay their mortgage, i.e., a tax cut. For some, a tax increase could literally mean the difference between making mortgage payments and deciding to let a house go. That latter decision will result in even a further slide in home prices and more mortgages under water. Thus, the Obama tax increase will, by definition, worsen the foreclosure crisis in Contra Costa by placing people in further jeopardy. That economic downward cycle will thereby hurt the California economy which, because it accounts for over 16% of the national economy, also will hurt the nation’s economy.

Of course, that dynamic is not limited to Contra Costa in this age of diminishing incomes in every corner of the country including a staggering new record of 102,124 bank repossessions of homes in September alone, that affect every income level. Moreover, the Bush tax cuts positively affected incomes as low as $35,000, i.e. far below the so-called rich – making the Obama tax increases all the more damaging.

I have long said that raising taxes in a down economy is like throwing a drowning man an anchor. Given Obama’s “don’t need it” view, you can amend that to say “it’s like throwing a drowning man an anchor and telling him to swim harder.” And with the country swimming in the highest combined debt, tax and regulatory burden in history, you can expect the economy to be bad for years to come – even if we get rid of this Congress that most of us didn’t ask for and certainly don’t need.

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