As a classically trained economist with reverence for John Maynard Keynes – the father of Macroeconomics – it pains me to write this.  On second thought it’s not Keynesian theory that’s flawed but its application by President Obama and the Democratic Congressional “leadership.”

Keynes theorized that in a robust economy fiscal policy ought to promote a stable price level through legislative manipulation that increased taxation and/or decreased spending.  Conversely during troubled economic times fiscal policy ought to promote full employment – employment at the “natural rate of unemployment” – by decreasing taxes and/or increasing spending.

Obama and team have flipped Keynesian theory upside down as they press forward with plans to support our nation’s jobless recovery by increasing taxes and spending not as investment but spending for the sake of spending.  If a double dip recession is in our future (which Apollo does not believe is the case) there’s no stopping it through more fiscal “stimulus.”  Rather, increased government spending will do little more than increase our nation’s debt, increase our reliance on foreign purchasers of Treasury bonds and pummel the value of our currency.

In January the top marginal income tax rate will rise from its current 35% to 39.6% or the top rate in effect prior to the Bush tax cuts.  Additionally the phase out of itemized deductions and personal dependency exemptions will effectively raise the top marginal rate to 40.8%.  Finally the 3.8% tax on investment income beginning in 2013 to pay for the recently enacted healthcare legislation will push the top rate to a whopping 44.6%.  Those living in a high tax state and/or a city imposing its own income tax can easily find themselves paying about 50%.  With the government taking half of income in taxes why should we bother to get out of bed and go to work?!

The tax hike will be crippling for two reasons:

First, it will hurt small businesses.  Most small businesses – the engines of job growth – are organized as S-Corps or LLCs meaning their profits are taxed not at the corporate rate but at personal income tax rates.

Second, the expiration of the Bush tax cuts will increase the tax bite on corporate dividends.  Specifically the current 15% rate will rise to the top marginal rate of 39.6% which, again, will grow to 44.6% due to the aforementioned phase outs and healthcare tax.  This massive increase makes equities less desirable which harms the stock market and produces a negative “wealth effect.”  To avoid the increased dividend tax corporations may spend the rest of 2010 increasing cash payouts to their owners – not necessarily a bad thing but it makes less cash available for reinvestment in the business, building of physical plant, hiring workers, etc.

What will consumers do with extra corporate cash payouts?  Not spend.  The marginal propensity to consume trails the marginal propensity to save among the investor class.  Any increased consumption will likely trail the drop in business activity resulting from the reallocation of cash from reinvestment in operations to shareholder distributions.

If our elected officials truly wish to sustain the economic recovery they need to entrust policy to Keynesian theory.  They need to extend the Bush tax cuts for all income levels.  They need to enact smart spending plans – investing in land, labor, capital and entrepreneurship while cutting one-time handouts that do nothing to preserve budgetary discipline.  The Obama plan of infinite and relentless taxation reminds us of Margaret Thatcher’s famous quote:  “The problem with Socialism is that eventually you run out of other people’s money.”

It was “W” who gave us the promise of economic vibrancy.  Was he really the idiot the media wants to make him out to be or is the true idiocy to be found in Obama’s economic voodoo?  Hmmm…