Naturally, Obama blames the need for such deficits on the Bush Administration. Obama did indeed inherit a deficit, though as a senator in a Democratic-controlled Congress, he voted with a majority of other Democrats for legislation that created the deficit, such as TARP. As President, however, Obama has only worsened the deficit situation, presiding over a $1.4 trillion deficit in 2010, now proposing a $1.56 trillion deficit for 2011, and projecting future deficits for the rest of his term.

There is also a great deal of grandstanding about the budget’s “freeze” on some discretionary programs. This proposal, which applies to only 17% of the budget for three years, conveniently occurs after large increases in appropriations to discretionary programs. Despite the fact that it will have a negligible effect on the projected deficits of the United States, Obama is peddling the gesture as evidence of his commitment to fiscal responsibility.

This budget is based on the mistaken economic theory that government expenditures – in this case, deficit-financed expenditures – have a beneficial macroeconomic effect by increasing “aggregate demand,” and thus output. Government spending, however, must be financed by taxes and borrowing, which undermines the net effect of any expenditure. For every dollar of spending, the government confiscates one dollar from the private sector, canceling out any supposed benefits.

Taxes and borrowing also distort the economic activity upon which they are levied, leading to microeconomic inefficiencies in the markets. This “efficiency cost” reduces economic activity, ultimately decreasing the economy’s output and the government’s tax revenues. To increase output and tax revenue simultaneously, the government should implement policies that promote economic activity, particularly supply-side incentives.

Obama’s 2011 budget is oblivious to the abject failure of the government’s stimulus efforts, and is a grave threat to future generations of Americans. Fortunately, for all their power, politicians cannot repeal the laws of economics.

The purpose of the tax is ostensibly for direct beneficiaries of TARP – the 2008 “bailout” legislation – to repay the government. “We want out money back, and we’re going to get it,” claims President Obama. The rationale of TARP and “too-big-to-fail” policy in general, however, was that the failure of financial institutions was a “systemic risk” to the economy, and that preventing failure would indirectly benefit the public. Depicting financial institutions as the sole beneficiaries of TARP misrepresents the entire purpose of the legislation.

TARP funds, furthermore, were not distributed solely according to financial need; in order to protect runs on failing financial institutions, all were required to accept some TARP funds regardless of need.  Many of the financial institutions this tax targets have already repaid the government for TARP. For example, of the 10 major financial institutions which received TARP funds – some of which neither needed nor wanted it – only 1 has not fully repaid the government.

In fact, the government’s biggest losses are from the bailout of Fannie Mae, Freddie Mac, General Motors, and Chrysler, yet these government-sponsored enterprises and union-backed automakers are exempted from the new tax. Perhaps the Obama Administration’s ulterior motive is to tax financial institutions in order to recoup its losses from bailing out its favored failures; Fannie and Freddie can continue to underwrite risky mortgages, and Detroit unions can continue to fund the Democratic Party. Or maybe the tax is simply an election-year stunt to pander to public resentment of “Wall Street,” sacrificing innocent financial institutions on the altar of reelection. With such a disingenuous rationale and unfair administration, this tax cannot be considered serious policymaking, but rather a shameless political ploy.

Levying a tax upon a financial institution’s liabilities has the potential for negative economic effects, particularly decreased lending operations and a globally disadvantaged American financial industry. Given that the tax is levied upon liabilities (rather than a more liquid base), financial institutions will pay the tax from net income, though cash-flow problems may force them to pay from retained earnings. Since lending is a “fractional reserve” process (meaning bank reserves are only a fraction of their total loans), any such decrease in the equity of financial institutions will exponentially decrease lending. Of course, financial institutions – like all taxed corporations – will cancel out the tax by passing its costs along to the consumer as much as possible. If the tax becomes too burdensome, however, financial institutions can relocate to more competitive financial centers like London or Tokyo, thus depriving the American economy of valuable financial services, and the government of corporate and income tax revenue. Although Obama wishes to gratify liberal rage at financial institutions, this tax will do the economy more harm than good.

The Obama Administration’s financial-crisis-responsibility fee is based on false pretenses, an egregious display of political favoritism, and will negatively affect the economy. The American people should reject Obama’s populism and demagoguery for rational economic policymaking.