Obama’s Assault on the Poor

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
December 1, 2009

IN THIS ISSUE:

1.   How’s That Obama Tax Cut Working For You?

2.   Obama’s Regressive Policies Affect on the Poor

3.   A Laundry List of Regressive Initiatives

4.   Smoke and Mirrors

Introduction

During the 2008 presidential campaign, we heard now-President Obama declare that he would cut taxes for 95% of Americans.  Consequently, a number of analyses were performed on his proposals, some supporting his 95% claim and others debunking it.  As in most election campaigns, analyses tend to be skewed toward their sponsors’ way of thinking.

Fast forward to 2009, and we see that President Obama has championed legislation that reduced taxes for most working individuals.  As imperfect as The American Recovery and Reinvestment Act of 2009 (the “Stimulus Bill”) was, it did contain a certain amount of tax relief through a reduction in payroll taxes and adjustments to certain tax credits.

That’s the good news.  The bad news is that these same working Americans may also be subjected to legislation and other initiatives that can more than offset any tinkering around the margins Obama has done to produce tax cuts.  In fact, some of these current and proposed laws would hit the poorest Americans much harder than any other demographic group.

This week, I’m going to chronicle some of the changes that President Obama has supported and their effect on those least able to pay the tab.  Some of these policies and programs have been enacted and others are just proposed, but either way they show that the Obama administration is no friend of the average working American, and especially not the poor.

Promises Kept – A Mildly Stimulating Tax Reduction

Any discussion about the effects of President Obama’s current and proposed tax initiatives would be unfair if it did not include the fact that tax reductions of a sort have taken place, and have affected most working individuals.  The Stimulus Bill ushered in tax cuts in the form of the “Making Work Pay Tax Credit.”

These tax credits are available in 2009 and 2010 in the amounts of $400 per single taxpayer and $800 for joint filers.  To stay true to the 95% promise, the tax cuts are completely phased out for individuals earning over $100,000 per year and couples earning over $200,000.  The tax credit is refundable, so even those who owe no income tax can receive a benefit.  Social Security recipients and other retirees received a one-time payment of $250.

Because tax credits typically only become available after filing a tax return, the Stimulus Bill provided that these credits were to be paid out through a reduction in payroll taxes during the year.  The thought process, no doubt, was that a little extra in the paycheck would result in higher spending and, as a result, an economic recovery.

The Making Work Pay Tax Credit wasn’t the only provision of the Stimulus Bill to affect American taxpayers.  It also provided for limited expansion of the “Earned Income Tax Credit” and increased the eligibility for the “Additional Child Tax Credit.”  It also enhanced the “Health Coverage Tax Credit,” provided for a first-time homebuyer tax credit and allowed for the first $2,400 of unemployment benefits to be tax-free.

So, how’s the tax credit working out for you?  If you’re like many working Americans, it’s been pretty much a non-event.  Yes, it provides a little more money in the paycheck each month, but I suspect that the relatively small amount and temporary nature of the tax credit limit its effectiveness. 

At this point, it’s hard to tell whether or not these tax benefits were successful in kick-starting the economy.  While we’ve had a modest economic recovery since the Stimulus Bill was enacted, many analysts attribute this more to the “Cash for Clunkers” and first-time homebuyers programs, among others.  Some also note that these tax credits were mostly saved rather than used to increase consumption.  Even so, the president gets a check mark for fulfilling the “95%” campaign promise.

Of course, most of the provisions discussed above are temporary and apply for only one or two years, making these tax cuts a mixed blessing.  They may help out in the short-term, but provide no lasting tax relief, even for lower-income Americans. 

Other Policies Hurt the Poor

Also in the spirit of fairness, I think it’s important to bring to light a number of lesser-known policies supported by the Obama administration that are having or could have a negative effect on the poor.  Depending upon the habits and situation of many lower-income Americans, these policies may more than offset the benefits gained from the Stimulus Bill.

In addition, unlike most of the Stimulus Bill allowances, the policies that hurt the poor are intended to be more permanent fixtures in the tax code.  Thus, while the tax relief is generally temporary, tax increases usually last forever.

Below, I have listed a variety of new and proposed policies supported by the Obama administration that have either a direct or indirect negative effect on lower-income Americans.  While some of these are likely the result of unintended consequences, others have already been criticized for being regressive and yet the administration continues to move forward.

Increased Tobacco Tax

One of the first actions President Obama took after taking office was to increase the tax on tobacco products.  And this was no small increase.  Taxes on cigarettes, cigars, chewing tobacco and other products were raised anywhere from 158% to 2,653%.  Yes, you read it right – one tobacco product had a tax increase of over 2,600%.  Below are the details of the various tax increases by each type of tobacco product:

Tobacco Product

Previous Tax

New Tax 

% Increase

Cigarettes

$0.39/pack

$1.01/pack

     158%

Pipe Tobacco

$1.10/lb

$2.83/lb

     158%

Large Cigars

$0.05 each

$0.40 each

     722%

Small Cigars

$0.04/pack

$1.01/pack

  2,653%

Chewing Tobacco

$0.20/lb

$0.50/lb

     158%

Snuff

$0.59/lb

$1.51/lb

     158%

The purpose of this huge tax increase was to fund the State Children’s Health Insurance Program (S-CHIP), a program that helps lower-income families obtain health insurance for dependent children.  However, some of the proponents of this legislation noted that their primary reason for supporting this bill was to make tobacco products so expensive that users would opt to quit rather than paying exorbitant prices for tobacco products.  A March 29 Fox News article noted:

“Medical groups see a tax increase right in the middle of a recession as a great incentive to help persuade smokers to quit."

That brings up an interesting question – what happens to S-CHIP if everyone decides to give up tobacco products?  It seems odd to fund an ongoing health care initiative for uninsured children with a tax designed to help decrease demand for the products upon which it is levied.  Since the S-CHIP program is designed to aid lower-income families, if the anti-tobacco lobby gets its wish, the availability of S-CHIP might become unavailable to those who need it.

However, even the most ardent anti-smoking activists know that everyone will not stop using tobacco products just because of a price increase.  Sure, the higher prices will drive some people to quit, but overall demand probably won’t be affected all that much.  This brings us to another issue that directly affects lower-income individuals:  a Gallup Poll taken in the spring of this year indicated that there is an inverse relationship between household income and the likelihood of smoking.

In other words, as a general rule, more lower-income individuals smoke than those in higher income brackets.  The Gallup Poll found that 53% of smokers come from households with less than $36,000 annual income while only 12% of smokers come from households with incomes of $90,000 or more.  Thus, increased tobacco taxes have a disproportionate effect on the poor.

Of course, with smokers being such an unpopular minority (only an estimated 21% of Americans are smokers), tobacco users seem to be fair game for both state and federal tax legislation.  Even so, for someone with a two-pack-per-day habit, the new federal 62-cents-per-pack cigarette tax increase will cost them about $38 more per month, which pretty much negates any benefit from the Making Work Pay Tax Credit for a single taxpayer.  And unlike the temporary tax credit, the tobacco tax increase will continue long after the stimulus payments are forgotten.

Cash for Clunkers

The mainstream press has heralded the “Cash for Clunkers” program a huge success.  According to government figures, close to 700,000 vehicles were traded in for new, more fuel efficient transportation.  Other sources, however, have painted a much different picture, but I’m not going to get into that discussion today.  (I did, however, include an interesting Special Article at the end of this E-Letter that disputes the “official” government report of Cash for Clunkers results.)

Today’s focus is to highlight Obama administration policies that have a negative effect on the poor.  In the Cash for Clunkers program, the first thing you notice is that this benefit was not available to most poor and low-income Americans.  After all, the program provided a trade-in credit of up to $4,500, but the remainder of the new vehicle had to be financed or paid for in cash.  Lower-income households have a hard time doing either one.

However, not being able to participate in the Cash for Clunkers program doesn’t necessarily put low-income individuals at a disadvantage, but another consequence of this ill-fated program does.  By taking almost 700,000 older model cars off of the road, the program helped to raise the cost of vehicles for those who consider “clunkers” to be a primary source of affordable transportation. 

Granted, some scoff at the idea that taking a mere 700,000 vehicles off the road had an effect on used car prices, since it’s a mere drop in the bucket compared to the estimated average of 40 million used car sales per year, as reported by the Bureau of Transportation Statistics.  Supporters also point to increasing used car prices even before the Cash for Clunkers program came about, generally due to demand from car dealers whose new car sales had gone flat.

However, it is important to remember that the “clunkers” targeted by the federal rebate program were generally older, lower gas mileage models that don’t make it onto the lots of glitzy high-end dealerships.  Instead, these cars are purchased as affordable transportation by lower-income households.  Thus, taking almost 700,000 cars out of the low-end used car market did have the disproportionate effect described by many critics of the Cash for Clunkers program.

And evidence for this is more than anecdotal.  One of my staff members has a relative in the car business here in Austin, and he has told us that the Cash for Clunkers program definitely had a direct effect on his business.  For example, he says the average price for the older model used cars he buys at auction are 20% to 30% higher now than they were before the Cash for Clunkers program snapped up so many automobiles.  Since these price increases are passed along to consumers, low-income car buyers have essentially been hit with a major price increase for basic transportation.

Even worse, the resulting price increases for affordable transportation now require an increased down payment, which is hard to come by for someone whose work hours may have just been cut due to the poor economy.  Plus, a higher amount has to be financed, which is no easy task in this era of tight credit, especially for subprime borrowers.  The bottom line is that the Cash for Clunkers program has priced many low-income individuals out of the used car market.  

However, it doesn’t end there.  For those who forego buying another car and try to make do with the old one, prices for parts are also on the increase thanks, in part, to the Cash for Clunkers program.  The demand that clunkers be rendered inoperable has removed a ready supply of used car parts.  Yet again, those who can afford new cars win, those who can’t lose.

And on a related note, the Cato Institute predicts that President Obama’s September decision to impose a 35% tariff on tires imported from China could raise the prices of low-end tires by 20% to 30%.  While the tariff applies to all tires, low-priced tires are expected to be the hardest hit.  Since these “entry-level” tires are usually purchased by those with limited incomes, this tariff is another Obama policy likely to have a disproportionate effect on the poor. 

Back to the Cash for Clunkers program, some have said that the spike in used car prices is temporary and will be worked off as new car sales produce a renewed supply of trade-ins.  However, our Austin car dealer doesn’t think that’s going to happen anytime soon.  New car sales have softened considerably after the Cash for Clunkers program, which means that there are fewer trade-ins for the used car market. 

Our dealer friend says that used car auctions that used to run 3,500 cars per week are now down to just over 2,000 cars.  Thus, it’s going to take quite a while to rebuild used car inventories and bring prices back down.  Unfortunately, having the price of affordable transportation increase while the economy is in the dumpster is just an extra jolt to the finances of those who can least afford higher out-of-pocket expenditures.

Cap-and-Trade Legislation

While the push for cap-and-trade legislation has not yet been made into law, it has already been described by no less than Warren Buffett as being a “regressive” form of taxation that will have a much greater negative effect on those in lower income brackets.  You may recall that Mr. Buffett is an Obama supporter, so this is one of those rare occasions where the economic realities are at odds with politics as usual.

By way of background, I wrote about cap-and-trade legislation in my July 14, 2009 E-Letter.  In a nutshell, a cap-and-trade system limits the amount of greenhouse gasses industry is permitted to release into the environment.  To exceed this limit, a business would have to purchase (or trade) allowances from other businesses who produce less than their permitted cap.

The end result is that industries that burn fossil fuels and produce the most greenhouse gasses will have increased costs of production due to the requirement to purchase the right to exceed their emissions allowance.  It’s not likely that much, if any, of this increased cost will be absorbed by the business, so consumers will likely end up footing the bill.

Of course, this entire system is predicated upon the idea that global warming/climate change is caused by human activity, predominantly “dirty” industries such as steel production, coal-powered electric generation plants, gasoline refineries, etc., etc.  Again, the theme of this article does not allow space for a discussion of the merits (or lack thereof) of the arguments for and against man-made global warming.  Instead, we want to see how implementation of cap-and-trade legislation may affect the pocketbooks of low-income Americans.

The Energy Information Administration estimates that the burning of fossil fuels supplies about 70% of the electricity generated in the US.  The most common fossil fuels are gas, petroleum and coal, with coal alone accounting for approximately 50% of the power generated in the country.  If 70% of the electric generating plants have to pay higher taxes, you know who will end up footing the bill.

Of course, politicians like to claim that they are not taxing the public, but rather taxing polluters.  I guess only a politician can’t understand the obvious fact that any such taxes will be passed on to consumers.  Thus, if cap-and-trade legislation increases the costs of 70% of the electricity used in the US, then it’s a pretty good bet that your electric bill will be increasing – and that’s just one of the goods and services that will be affected.

When you then consider that lower-income families spend a greater percentage of their income for basic goods and utilities, it doesn’t take a rocket scientist to figure out that this demographic group will be hit much harder than any other.  A March 2009 Wall Street Journal article noted the following regarding Obama’s cap-and-trade proposal:

“Hit hardest would be the ‘95% of working families’ Mr. Obama keeps mentioning…Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating.”

Opponents of cap-and-trade legislation also claim that it will also result in higher unemployment, but the Obama administration claims just the opposite.  So who’s right?  The website FactCheck.org researched claims by the Obama administration that 1.7 million “green” jobs would be created by a cap-and-trade system and compared it to opposing claims that up to 2.4 million jobs might be lost.  Here’s what they found:

“It’s true that limiting carbon emissions would create some jobs – building wind turbines or insulating homes and businesses, for example. But it’s equally true that raising the cost of burning coal and oil would act as a drag on the entire economy, slowing down job creation in other industries.

According to projections by the Energy Information Administration and the nonpartisan Congressional Budget Office, the net effect of the House cap-and-trade bill will likely be to slow future job growth. Using 11 different possible future scenarios, EIA projects that future job growth might be constrained by something between 388,000 (under the most optimistic assumptions) and 2.3 million (assuming everything goes badly) 20 years from now. CBO also says employment would likely be lower than it would without the legislation – but only ‘a little.’

So claims that the bill would create hundreds of thousands of ‘green jobs’ are misleading, at best. The government’s own official economic projections indicate more jobs will be lost than created.”

So, not only will cap-and-trade increase costs of goods and services, it’s also likely to cost jobs in the economy – a double whammy for low-income families.

Soaking the Rich

I’m sure you will recall that President Obama was elected, in part, based on his pledge to not only cut taxes for 95% of working Americans, but also to raise taxes on all the “rich” who had benefited from tax cuts during the Bush administration.  I have already detailed above how that same 95% of Americans will likely forfeit any benefit of Obama’s earlier tax cuts, but it’s also important to discuss how “soaking the rich” could also negatively affect the poor.

Back in February of this year, Obama’s 2010 budget proposal included, among other things, raising the top marginal tax bracket to 39.6% and reducing the tax deduction for charitable contributions for persons making over $250,000 per year.

Normally, if someone gives money to a qualified charity, they get a tax deduction applicable to whatever marginal tax bracket they are in.  Thus, if Obama increases the top tax bracket to 39.6%, a $10,000 contribution would actually “cost” only $6,040 since the contributor would get a $3,960 write-off.  Under Obama’s proposal, the tax savings would be limited to the 28% tax bracket, resulting in $1,160 less tax savings ($3,960 - $2,800 = $1,160).

So, how does this affect the poor?  As we saw in the ill-fated “luxury tax” under President  George “Read My Lips” H. W. Bush, penalizing certain activities usually reserved for the “rich” can result in unexpected behavior.  In the case of the luxury tax, wealthy individuals simply stopped buying cars, boats, airplanes and other luxury items subject to the tax, resulting in many of those employed at high-end goods manufacturers losing their jobs.  This was yet another case study on the law of unintended consequences.

Now fast forward to the Obama charitable contribution proposal.  The income tax deduction for charitable contributions sometimes makes it possible for higher-income households to actually give more to charities than they might absent a tax benefit.  Thus, charities fear that reducing the tax benefit of charitable contributions will have a negative effect on contributions and, in turn, services they can provide.

And if charitable contributions decrease, guess who’s going to be affected the most.  That’s right, the poor are the primary beneficiaries of many charitable organizations.  Thus, it just makes sense that if charitable contributions drop, so will services to this demographic group.  Charities are having a hard enough time getting by in light of the current economic situation, and they certainly don’t need an additional headwind in the form of changes to the tax law.

Fortunately, the charitable contribution limitation was not part of the final budget bill, but it has resurfaced in discussions on how to fund health care.  I suspect that we have not yet seen the last of this proposal, misguided as it may be.

Credit Card “Reform”

Congress’ idea of reform appears to be passing laws containing tough provisions but then giving the targets of these laws ample time to negate the effect.  That’s exactly what happened in regard to the Credit CARD Act of 2009.  Passed into law in May of 2009, the provisions do not take effect until February of 2010, giving credit card companies plenty of time to circumvent many of the key provisions of this new law.

For example, one of the key provisions of the law limits credit card issuers from unfairly raising interest rates.  However, this rule doesn’t apply until February of next year so in the meantime, credit card companies are busily raising ratesAccording to the Federal Reserve’s quarterly survey of senior loan officers, 54% of banks have already or will soon increase credit card interest rates on their customers with good credit.

For those with subprime credit, which includes many low-income families, the news is even worse.  The Fed survey found that 74% of banks have already or will increase interest rates on subprime customers.  Add to this the fact that just over half of banks either have cut or will cut the credit limits of their customers, and you get a major reduction of credit for lower-income households.

For customers seeking new cards, 47% of the senior loan officers indicated that they will increase credit score requirements for prime customers, but this jumps to 53% when considering subprime candidates.  Plus, almost 40% of banks have increased or will increase annual fees on credit cards.

If you have a credit card, this is probably not news to you.  You have probably already received notices from your issuing companies about increased interest rates, decreased credit limits or both.  Many customers are using savings to pay off their balances to escape these ever-increasing interest rates and fees.  However, this option is usually not available to lower-income card holders, since they have limited or no savings, so they have to just grin and bear it.

And just in case you thought that this new law would have a positive influence on credit card companies before it goes into effect, it has not.  A recent study released by the Pew Charitable Trust indicated that its survey of 400 credit card issuers found that 100% continue practices that will be outlawed by the CARD Act in February of 2010.  In effect, credit card companies have been given a window of opportunity to raise interest rates so high before the law goes into effect that there will be little need to do so afterward.

An even more disturbing possibility relating primarily to lower-income and subprime borrowers is that, as credit through traditional avenues becomes harder to get, these consumers may seek out other, less favorable sources of credit.  Some fear that low-income consumers unable to get credit cards will seek out payday lending, auto title loans and pawn shops, which are far more expensive ways to borrow money. 

In a perfect world, we would all live within our means and not have to access credit for emergency expenses and sometimes even consumer staples.  However, the poor in our society do not always have the ability to do so.  Thus, credit card “reform” has only served to enrich banks at the expense of consumers who are left with few other options.  Yet again, a governmental “fix” results in a disadvantage to the poor.

Conclusions

Perhaps it’s the ultimate irony that Obama’s very first tax increase was on tobacco products, since most of his other policy aspirations regarding average working Americans are various combinations of blowing smoke.  Of course, you won’t see an analysis of all of these programs and their effect on the poor in the mainstream media.  They are far too busy adoring the man they worked so hard to get elected.

While Obama’s “stimulus” plan did provide some level of temporary tax relief, these reductions are likely to be more than offset by present and proposed increases in taxes as well as the costs of some goods and services.  Lest we forget the kind of promises candidate Obama made to the American people prior to his election, I have reproduced below excerpts from an Associated Press article penned earlier this year in response to the increase in the tobacco tax:

“I can make a firm pledge,” he [Obama] said in Dover, N.H., on Sept. 12. “Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

He repeatedly vowed “you will not see any of your taxes increase one single dime.”

In some instances during the campaign, Obama was plainly talking about income, payroll and investment taxes, even if he did not say so.  Other times, his point appeared to be that heavier taxation of any sort on average Americans is the wrong prescription in tough times.

“Listen now,” he said in his widely watched nomination acceptance speech, “I will cut taxes—cut taxes—for 95 percent of all working families, because, in an economy like this, the last thing we should do is raise taxes on the middle class.” [Emphasis added, GDH]

Perhaps President Obama can justify his actions and initiatives since most don’t involve an actual tax, but rather a possible increase in the costs of goods and services.  For the poor, however, it matters little whether increased costs come from taxes or price increases.  Both land under the expense section of the family budget.

Most disturbing (but not surprising) to me is that it is very apparent that Obama has increased taxes and the costs of goods and services to the poor based on his allegiance to pet political constituencies.  For example, the cap-and-trade and Cash for Clunkers programs were clearly designed to please the environmental movement, while the tire tariff was a gift to the unions.

Plus, the above discussion is by no means exhaustive.  Other policies such as the union card check proposal, cuts in Medicare/Medicaid and various environmental initiatives may also have an unequal effect on the poor.  Plus, no one yet knows what will happen with the cost of health care, but you can bet it’s going to cost more and affect more taxpayers than expected.

The way it looks to me, if President Obama gets his way the poor of our nation will fare considerably worse under his policies and initiatives, not to mention most of the other 95% of taxpayers he vowed to help out.  Do you suppose that's the kind of change they voted for?

Wishing you lower taxes,

Gary D. Halbert

SPECIAL ARTICLES:

Trucks Win in Cash for Clunkers Game
http://money.cnn.com/2009/08/07/autos/cash_for_clunkers_sales/

Cap-and-Trade: “Green Jobs” or Job Killer?
http://www.factcheck.org/2009/10/cap-and-trade-green-jobs-or-job-killer/


Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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