Barack Obama recently released his budget for 2010. The budget results in an estimated $1.75 trillion deficit for 2010 – the largest deficit ever.  This, just a couple days after President Obama had announced that he will cut the deficit from his predecessor in half by the end of his first term in 2013 (source).  Not only that, but the budget of $3.6 trillion with the $1.75 trillion deficit does not include extraneous trillions upon trillions in spending on such projects as the stimulus, bailouts,  etc.  Do not be fooled by these politician tricks.  The “deficit” as announced in the news is only on the actual budget, but the budget is separate from the other projects put into place in the last few months.  Realistically spending and the deficit are trillions more than the $1.75 trillion deficit that is commonly reported.  In his budget, President Obama outlines a number of programs.  I won’t get into these programs, despite their being completely absurd.

What frustrates me even more than these programs, though, are the taxes in his new budget.  The simplest expansion of taxation is his increasing the top two marginal tax rates from 33% and 35% to 36% and 39.6%, respectively.  Increasing the taxes in the top marginal tax brackets serves to do one very important thing: it dramatically decreases the incentive for the rich to earn more money!  This means that it makes less sense for your boss to keep you in your job than it did before.  Your boss stands to make only sixty cents on every dollar you produce instead of sixty-five cents.  That means that you have immediately become 7.7% less valuable to your boss than you once were.  Additionally, a new worker that is hoping to get hired to a job is 7.7% less valuable to the person he is interviewing with, making that worker less likely to be hired.  This from a President and Congress that has been pushing hard to “create or save 4 million jobs.”

In addition to raising the top marginal tax rates, President Obama also increased the capital gains tax from 15% to 20%.  To clear things up, capital gains taxes are levied whenever an asset is purchased, held for at least one full year, and then sold for more than the initial purchase price.  The amount that is taxed is the difference between the purchase price and the sale price and is not adjusted for inflation.  So, if you purchase a house for $100,000, rent it out for five years, and then sell it for $150,000, you will owe taxes equal to 20% of that $50,000 gain, or $10,000.  The same is true for any investment you make (stocks, bonds, companies, real estate).  Most people in this nation pay less than 20% taxes on their income.  As such, any one of those people has absolutely zero incentive to invest their money.  In fact, they have an incentive to not invest their money because they will be taxed more if they do invest it.  People that pay more than 20% in income taxes also have far less incentive to invest their money because they are paying 33% more taxes on that investment than they were a year ago.  What does this mean?  Well, among a slew of other disastrous consequences, it means that fewer people will purchase houses.  With the capital gains tax incentive of home ownership decreased, home ownership becomes less appealing.  As fewer people have an incentive to buy a home the demand for homes decreases.  As the demand decreases the price will also decrease because there is no sound way to decrease the supply.  So, higher capital gains taxes will almost certainly contribute to falling home prices as well as falling prices for virtually every other asset.  Not what you would expect from a President and Congress that have been preaching the importance of stopping the fall of home prices.

A sad thing is this: the capital gains increase was not the only step the President took to ensure that people would buy fewer houses.  As part of his budget, the President decided it would be a good idea to not allow people in the top two tax brackets to write off as much of the interest they pay on their mortgages.  Home owners are able to deduct the interest they pay on their mortgages from their incomes each year to decrease their tax liabilities.  This effort helps incentivize home ownership.  The President, however, does not think it is right that people with more money should be able to write off the full amount of the interest they pay and has told them that they must limit their deductions and thus pay more taxes.  What does this do?  Simple, it even further decreases the incentives for a portion of the population to purchase houses.  Not only that, but that portion of the population that it disincentivizes is the portion that would be the most likely to go around buying up multiple homes and, as a result, increasing the value of all homes.  Once again, the government’s efforts essentially guarantee a softer housing market in this nation.

This has nothing to say for all of the other ludicrous ideas the government has come up with to improve the housing market and it also has nothing to say for all the other problems that higher taxation will bring.  What should be taken away from this, however, is that we must read between the lines.  In one ear we have big brother telling us that they want to help us out by increasing the value of our homes; they want to keep us in our homes.  However, in the other ear we have them telling us that if we want to stay in those homes we are going to have to pay them dearly for it.  It does not make any sense.  The government once again has proven to be an animal with no rhyme or reason.  We have the same people that are telling us one thing doing the exact opposite.  We have to all open our eyes and see things as they are, not as they are presented.

Source: Wall Street Journal 2-27-2009 front page