Tuesday, March 3, 2009

The Cap-and-Trade Tax

John Mauldin raises an interesting point about President Obama's cap-and-trade proposal. I'm not convinced the proposal would cause utility companies to raise prices though - mainly because most have government-regulated prices.

If the costs aren't borne via higher prices to consumers, John's conclusions won't follow. That said, the increased costs will have to be dealt with somehow.

And I definitely agree that GDP is going to be *way* below the 4% forecast. The economy has been above the natural rate of growth for many years and tends to revert to the natural rate, which means we should anticipate years of sub-3% real GDP growth.

Obama wants to create a cap-and-trade program for carbon emissions. This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately.

It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.

Further, Obama's accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.
Buy and Hope Investing
John Mauldin
Thoughts from the Frontline Weekly Newsletter, 2/27/2009

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