Pay As You Go

For some historical perspective, here are some notes I made January 20th, 2009.

As of early October, Obama’s plan was still pay as you go. Pelosi and the blue dog (economic moderates) Democrats were convinced this was a doable plan even with a recession. However, the economic malaise has since proved to be so systemic both in this country and around the world, that revenues will probably fall short.

WSJ reported today (1/20/09) that, after the increase in the AIG bailout last night, there was talk among Democrats over the weekend that the bailouts are probably going to cost more than $700B even before Obama takes office. Secondly, the promised return of some of the money to the taxpayers from AIG is going to take longer than Paulson and Bernanke predicted.

Lastly, there was a cute little move that Paulson announced in September that went under most people’s radar – a change in Sec 382 of the tax code. It voids the tax that banks pay when they merge. The only ones who did notice this change were the mergers and acquisitions guys at US banks. It may mean as much as $140B in tax revenue gone this year and next. It sweetens the after tax bottom line for banks who want to merge.

I’m sure Paulson did this to encourage banks to buy failing assets and banks instead of the Treasury bailing them out but he made no announcement and the CBO was not notified to change their tax revenue projections because of the change. Corporations pay about $350-$400B in taxes each year so a $140B tax break to merging corporations is huge.

Barney Frank is questioning whether Paulson’s move was even legal, given a law that was passed in 1986. At any rate, tax revenues will be far less than even recently revised projections.

Obama can probably get some savings by drawing down troops in Iraq, which is costing us over $10B a month. General Petraeus is calling for more troops in Afghanistan so it is doubtful that there will be any savings in that combined military theater in the next 6 – 12 months. Iraq currently has a $70+ billion surplus and the U.S. may be able to get a down payment on the amount of money we have put into that country.

There is always cleanup to be done when Presidents like Reagan and Bush champion low taxes and high security. Reagan tripled the U.S. debt in his eight years, Bush has doubled it in his 8 years. Neither of them were very analytical, preferring to trust their guts and “shoot from the hip”. Each of them talked small government but delivered bloated government. Now we have a president who talks big government. Maybe we are living in a “bizarro” backwards universe where events turn out the opposite of presidential promises and projections.

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