Starboard Broadside

I did a double-take when I read a summary of Obama's new budget plan because I was startled during an economic crisis to read that "...Obama proposes to cut spending and raise taxes..."

Fortunately, when I read the full sentence again, it made a bit more sense, saying that Obama was going to cut Iraq War spending (by finishing up the war) and then raise taxes on the wealthiest brackets, as promised during the campaign. It's frustrating that the Washington Post had to phrase it in such anti-Keynesian terms. Since the election, I've read a lot of stuff from outlets like the WaPo, the NYT, and Politico that could be construed to pressure Obama not to raise taxes (on the rich) at least for several years. Because obviously certain people reeeeally like their Bush tax cuts and don't want their taxes to go up under Obama. So, anti-Keynes it is.

If you're not familiar with Keynesian economics and budgeting during a recession, for this post you just need to know that cutting taxes and raising domestic spending are the big tenets; outside of a recession, this pattern reverses to clear the deficit, by easing back on spending and raising taxes gradually to run a surplus. But the key point here is that during a recession, Keynesian budgeting would plan for more spending and more tax cuts overall.

The things to keep in mind when reading such articles is that the 1930s/1940s government recovery plans in the US did involve tax hikes - but only on the top brackets - as well as tax cuts for most Americans. It wasn't a one-way street. This kept the spending financed, since the US didn't really have anybody to get loans from then, but it also let average Americans keep more of their money. And remember that spending cuts by Hoover and FDR were cuts to domestic spending programs, which is not the same as blowing through federal money to finance a small war overseas that just keeps the money there. World War II was a fantastic Keynesian federal spending program, but the money was highly directed at the federal level, and it was primarily going to US manufacturing companies and their workers -- not to American CEOs, private contractors, and foreigners. During the war, the tax rates for the richest Americans climbed even higher, with some income tax brackets reaching 90% for a brief span. This dinged the accounts of the super-rich, but it didn't hurt the American workers as much as the 1937 tax hikes did. See note.

(UPDATE: Ok, I looked it up specifically, and the 1944 income tax rate was at least 90% for all brackets of over $90,000/year, all the way up to 94%. As a reminder, that doesn't mean that 94% of $200,000 went to the IRS; the rate only applies to the income above each line, i.e. 94% of the 200,001st dollar is taken in taxes.)
(UPDATE 2/Correction: Having reviewed the tax rates for the 1934 Act and the 1936 Act, it appears that incomes over $50,000 were the only ones affected in 1937... so I'm guessing that investors got the immediate effect of those hikes, not the workers. This tax rate history is really fascinating).

So, it's fine for Obama to raise the highest tax bracket rates, since he just slashed the lower bracket rates in the stimulus package. And it's also not a problem to cut spending in the Iraq War area of the national budget (and by the way, war spending just came back on-book for the US budget, making the official deficit jump). Unlike with the tax rate adjustments, this won't have too much of an inherent benefit since Obama will probably not redirect spending immediately into the US, but rather will just remove it so as to reduce the deficit and debt.

These are just things to consider when reading news about Obama's budget and tax plans. I'm not sure if this post was as clear as it should have been, but I'd be happy to address questions in the comments. I can tackle budget specifics later, but this is an overall view.

UPDATE 3 @ 5:37 PM: Ok, now I'm just confusing myself here with these updates. It seems that President Obama may just stick with an earlier plan to let the Bush tax cuts lapse, rather than end them now, on Keynesian grounds... despite what I've said here. Oh well. Think what you will. I'm still really intrigued by the tax rate history.