The lost decade part two.

President Obama released his budget today with tax increases to boot. All we have been hearing from policy makers is that we won't repeat the mistakes of the past. I thought raising taxes during a recession was one of them. It didn't work for Herbert Hoover in 1932 and didn't work for the Japanese in the 1990's tax cuts did.
From Bloomberg:
"Obama’s 2010 budget proposal, released today, would reinstate the top two Clinton-era tax rates of 36 percent and 39.6 percent in 2011, up from the 33 percent and 35 percent the richest Americans now pay. It would raise taxes on capital gains and dividends to 20 percent for top earners, up from the 15 percent set by former President George W Bush in 2003."

We could get in a class warfare argument that the rich don't pay their fair share, but looking at history raising taxes during a severe down turn has only had negative results. And using the rationale that during the Clinton era the rich got richer is a fine argument if we are talking about taxing 1993 dollars, but while a family bringing in $250,000 a year these days is comfortable it is nowhere near what type of affluence that was in 1993. So saying that you are bringing back tax rates to where they were when $4.50 would buy movie tickets and $1.30 could purchase a gallon gasoline is disingenuous.
Anyone that will have their taxes raised or more importantly think that they will have their taxes raised will think long and hard on how they will spend their discretionary income. Having the stock market go down 40% last year and down so far this year fear is in the air and capital preservation in going to be in the front of everyone's mind no matter what your marginal tax bracket is. Small business will lay people off or just not rehire when someone leaves.
Large segments of the middle class are already concerned about some of the Bush tax cuts expiring. A middle class retired couple relying on a pension, anemic bank interest and dividend income are concerned about the dividend taxes going back up. That is money out of the consumer economy.
People are scared now. Now is not the time to scare the people with money no matter it is right or wrong how much money they bring home in their pay check. Let's save this discussion for when things start to turn around.