Obama's budget sober on jobs, optimistic on growth

McClatchy NewspapersFebruary 1, 2010 

WASHINGTON — The Obama administration projects rosier economic-growth prospects than most mainstream economists do but a sobering jobless recovery, according to documents released Monday about underlying assumptions in the government's $3.83 trillion federal budget for 2011.

Other documents outlining proposed tax cuts and hikes reveal that the administration, concerned about growing income inequality, seeks to pay for a number of programs to help the middle class by taxing the wealthiest Americans and imposing new taxes on corporations, especially those with international operations.

The administration created a public relations nightmare for itself last year when it came into power forecasting an optimistic 8 percent unemployment rate. Policymakers then watched in horror as the jobless rate climbed to 10.2 percent before dipping back to 10 percent in December.

That mistake isn't repeated in the budget that President Barack Obama proposed for fiscal 2011, which starts Oct. 1. His head of the Council of Economic Advisers, Christina Romer, said Monday that she thought the jobless rate would stand at 9.8 percent at the close of this year.

It won't feel much better next year. Romer expects an unemployment rate of 8.9 percent late in 2011 and 7.9 percent in late 2012, the final full year of Obama's term.

More than 7 million Americans have lost their jobs since the recession began in December 2007. Romer's assumptions suggest rough sledding for some time to come.

"Our projections of the unemployment rate reflect the particularly severe toll that this recession has taken on the labor market and on American workers," she said.

The administration's growth projections, important to whether the government collects the revenue it anticipates, are more optimistic.

Romer forecast 3 percent growth this year, about where most mainstream economists expect it to be. For the following two years, however, she expects growth of 4.3 percent.

"I'm just glad Rosy Scenario has her old job back," quipped David Wyss, the chief economist for the rating agency Standard & Poor's in New York. His forecast calls for 3 percent growth in 2011.

The good news, he said, is that the administration offered a realistic outlook for the current year and left itself room to backtrack from future projections if it looks as if they were too optimistic.

It appears that it will be years before job creation approaches the levels of the previous decade.

"Unfortunately, because of the lingering effects of the credit crisis and the accompanying loss of household wealth, the recovery from the current recession is also expected to begin more slowly than in some recoveries in the past," the administration documents say.

Specific proposals to generate revenue will be fought out in the weeks and months ahead. In the administration's crosshairs for taxation are the finance sector and large multinational corporations.

The administration already had signaled that it hoped to raise $90 billion over 10 years by imposing a "financial crisis responsibility fee" on banks to recoup the indirect benefits they reaped from the bailouts over the past two years.

Buried deep in the administration's revenue proposals are additional steps to raise nearly $25 billion over the next decade by closing another loophole that lets, among others, managers of hedge funds for the ultra-wealthy pay a 15 percent capital gains tax on the profits they receive as their compensation for managing the fund. Most Americans who are compensated for their work pay a much higher rate through the tax brackets on ordinary income.

To help pay for an expanded child tax credit and other initiatives to aid the struggling middle class, the administration looks to impose new taxes on corporations or to close tax breaks.

Excise taxes to pay for environmental cleanup at Superfund sites would be reimposed on corporations to raise about $18.9 billion over 10 years. These taxes were eliminated in 1996.

A number of proposals to close corporate tax loopholes and make it harder to hide earnings abroad would raise $465.7 billion over a 10-year window. Many of these target multinational corporations that increasingly earn a greater portion of their profits abroad.

A congressional official with jurisdiction on tax matters, speaking anonymously because he wasn't authorized to talk to journalists, said it was unlikely that many of these business tax proposals would be adopted, however, because they didn't accompany a broader restructuring of corporate taxation.

Taxes now on the rich are likely, he said, because Democrats may not enjoy their comfortable congressional majorities after November's elections.

These measures would raise revenue by repealing tax breaks for families whose adjusted gross income exceeds $250,000. The level for single filers is $200,000. The tax cuts of 2001 and 2003 would be allowed to expire for these wealthier Americans, and they could pay a higher tax on stock market earnings and even be prohibited from the same mortgage-interest deductions that ordinary Americans take.

A senior administration official, briefing on the condition of anonymity in order to speak freely, explained that from 2002 to 2007 "65 percent of the income growth (in the nation) went to the top 1 percent" of earners.

Wyss, the economist, added: "You're looking at significantly higher taxes if you are doing well in this country. But at the same time, let's get real here. You're not going to do all of this on the spending side" to balance the budget.

BUDGET EXPLANATIONS CAN BE BAFFLING:

The Treasury Department's general explanations for the proposals to raise revenue in order to fund the federal budget sometimes can baffle.

Nestled deep in the document, called the Green Book because of its lime-colored cover, is a proposal to eliminate taxation of capital gains on investments in small business stock.

The tax break to aid small business would mean about $8 billion in lost tax revenue over a decade, and the proposal makes complete a 75 percent exclusion from capital gains taxes that was passed in last year's stimulus effort.

The problem is this: The elimination of capital gains for small-business stock investments wouldn't apply to companies that provide services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services.

Also excluded are firms in which the main asset is the reputation or skill of one or more employees in banking, insurance, financing, leasing, investing, farming, production or extraction of items subject to depletion, hotels, motels, restaurants or similar businesses.

Three senior administration officials who were briefing reporters about the revenue proposals were asked what companies do qualify. They answered, on the condition of anonymity in order to speak freely: the same ones that got the 75 percent exclusion last year.

Who might those firms be? They couldn't specify a company or industry.

As of filing time, Treasury spokeswoman Sandra Salstrom hadn't answered a follow-up request for clarification.

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