Does Washington Want Slower Economic Growth?
Its been a long-standing objective among American Politicians to work for a more robust economy. Franklin Roosevelt sought to bring the US out of the Great Depression. It was the chief reason Presidents Kennedy, Reagan, and Trump initiated tax cuts to spur the domestic GDP.
In 1992 James Carville, then President Clinton’s campaign manager, glided to victory with the simple aphorism, “It’s the economy stupid.” The most crucial objective for any future President is to grow the economy.
But all that has changed recently. Other issues, such as the environment and social change, have overtaken the economy as the number one objective for the current occupant of the White House.
For Joe Biden and his former boss, Barack Obama, social issues and other initiatives that fell under the “ Change “ rubric have become this Administration’s driving force. A case in point is the massive Inflation Reduction Act.
Passed a few short weeks ago, the Inflation Reduction Act has many additional taxes. The Joint Committee on Taxes found that this new Act will extract $180 Billion from wealthy income earnings, those making over $400K per year, and corporations. While more modest incomes, below $400K, will pay an additional $20 Billion. That’s a brand-new tax bill of $200 billion to come out of the economy annually.
True to its name, the Inflation Reduction Act, Inflation will decline, as will economic activity in general when people have less money to spend.
According to the Tax Foundation, the Inflation Reduction Act will affect every taxpayer, from the lowest to the highest. Something Candidate Biden said would not happen.
Overall the Tax Foundation estimates that the additional taxes from the Inflation Reduction Act will reduce economic Growth by 2/10th% in year 1.
These long-range adjustments to the Nation’s Tax Schedules have a cumulative effect. Gaining economic weight as they go along. So in year 5, for instance, these new taxes will have an even more significant negative growth impact on the economy than this year.
Not to be left off the tax-hiking bandwagon, the Internal Revenue Service reports that they will be raising tax rates in 60 different categories. Effectively “Indexing” our taxes to the prevailing inflation rate. And once again, these new higher tax rates will considerably impact the most productive among us: the high-income individuals and corporations.
I guess it’s a good thing the IRS hired all those new agents. You wouldn’t want the agents to be overworked collecting all those new taxes.
The most astonishing thing about the new Inflation Reduction Act is how skillfully it has been marketed. A marketing effort that began when Congress passed the multi-thousand-page Bill. No Representative or Senator had the time to read the entire Bill. Instead, Congress relied on others, principally the Administration, to provide summaries of its provisions.
The first stroke of marketing magic was the name: Inflation Reduction Act. Who could vote against something that Reduces Inflation? Score one for the Administration. The fact that the Act does nothing of the kind is irrelevant. There are no provisions for reducing the price of gasoline, for instance, the number one contributor to Inflation.
Next came the clever use of “tax credits.” Washington loves tax credits; it costs them nothing, yet appears to support favored initiatives. The most prominent tax credits in the Act provide for tax credits for “clean energy homes,” as well as Electric Vehicles.
Just remember, you receive no money for these credits. Instead, the Federal Government reduces your overall taxes owed. But if your taxes in 2023 are higher than they were in 2022, have these individual tax credits helped you in any way? I don’t think so. When your taxes rise, as will likely be the case for most people, tax credit or not, your discretionary income falls.
Economic Growth that is perilously close to Recession level. We begin the year with most Wall Street Analysts estimating that this year’s GDP Growth Rate will be around 1/2%. Perhaps the lowest estimate on Growth in a non-recessionary year ever. And discretionary income is the key to our economic Growth.
Wall Street is highly skeptical that meaningful economic Growth will occur this year. Instead, we will have higher taxes, favored environmental and social programs, and the ephemeral promise of lower Inflation.
And this is all brought to you by the collective voices in Washington. These programs have all been initiatives designed in the White House. Combine these with the expected higher interest rates from the Federal Reserve, and you have created some very high hurdles for this economy.
Perhaps James Carville should have said: “It’s the social programs, tax credits, and environmental initiatives, stupid.”
Econ Briefs
In economic news, Jobs are front and center this morning. Amazon CEO Andy Jassy announced that the giant online retailer will lay off 18,000 employees. These cuts represent 6% of the company’s corporate workforce and constitute a significant restructuring for Amazon.
Also making a dramatic change in their employment picture was SalesForce.com. Salesforce announced it would cut 10% of its staff to meet declining economic conditions.
Overall, January starts as a time for significant cutbacks.
It’s a trend that started late last year. Challenger, Grey, and Christmas noted in their latest tabulation on layoffs that November last year saw 43K jobs lost as companies began cutting back on overhead. However, January will see the number of pink slips increase dramatically over 2022.
Over in Europe, Italy makes it unanimous. All of the big four European Economies are seeing reduced inflation. Although Italy was the least reduction, only 2/10ths%, they joined France, Germany, and Spain in reporting lower prices. Let’s hope this trend continues.
Here in the US, we’ll see the latest in the Balance of Trade, expected to show a slight decline but remain above $70 billion for November. Also reporting today will be the Initial Claims for Unemployment Insurance.
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