Fatal Flaw: President Obama’s New Budget

The President’s new budget proposal has a fatal flaw. Well, actually it has quite a few, but the single largest flaw is the projection of revenue increases which by themselves, will prevent the level of deficit reduction being claimed from ever happening.

Now, in the President’s defense, we can only base any judgments on the speech he gave about the plan because we have not been provided with any details. The only detailed plan the President has provided is his original FY2012 Budget that he released in February, which I like to affectionately refer to as the “just wanted to see if you were paying attention” plan. This proposal was touted by the President as a budget that would have us “live within our means”, when in fact, it would almost double the national debt over ten years, and the smallest deficit during that time period would be over $600 Billion.

Now that the President is officially on the campaign trail, he recognizes that the American people want spending cuts, so he is now offering up the “just kidding, here’s my real plan” budget. The problem is that as I mentioned previously, it has a fatal flaw that few seem to recognize. His plan calls for $4 Trillion in spending cuts over 12 years. Why 12 years instead of 10? Typically speaking, the reason why the Government uses a 12 year date range instead of 10 is because the bulk of the projected fiscal impact takes place in the last 2 years. But, I digress…

Of the $4 Trillion dollars in spending cuts, $2 Trillion is due to “spending cuts in the tax code”. You’ll hear that a lot going forward, as well as “cuts in tax expenditures” because those sound much more fiscally responsible than saying “tax increases”. Apparently, this administration thinks that the American people are stupid and don’t understand the difference. It’s as if they think that we don’t understand what is meant by their creative semantics.

Here’s the problem with the tax increases:

First, it would seem that the President and the hard left are the only people on the planet that don’t understand that raising taxes has a depressive effect on the economy. If you take more of people’s money, regardless of whether they are rich or poor, they will have less to spend on goods and services and less money to invest, which are the drivers of economic growth and job creation. It is really that simple.

Second, and more important, projecting an additional $2 Trillion in revenue from tax increases is just not accurate. The amount of revenue generated from taxes is NOT proportionate to the marginal rates. In other words, raising taxes by “x” percent does not mean that you will get a revenue increase of “y” dollars (and vice versa). The more you increase taxes, the more people will look for investments that shield them from the high tax rates, such as tax free municipal bonds, instead of other markets that provide capital for business growth. Higher taxes also result in more people cheating on their taxes and to the point in the previous paragraph, investing and/or spending less because they have less to spend.

A perfect example of this is the effect of the tax increases under President Clinton. Under his administration, Congress raised taxes. In the following years, tax revenues did increase and they did so at a faster rate than GDP. The problem however, is that according to the House Joint Economic Committee, the tax revenues increased by only about 60% of what they projected. In addition, a disproportionate amount of the revenue increases were from capital gains taxes, which were lowered, not raised. Why? See the previous two paragraphs. And keep in mind, the Clinton tax increase took place during the dot-com boom when our economy was in overdrive.

Another example is the Bush tax cuts. Claims were, then and now, that the Bush tax cuts cost us around $1 Trillion, but the facts are that is just not true. Let’s remember, when President Bush took office, the dot-com bubble (that President Clinton was able to ride) had burst and the country was entering a recession. That was the reason for the tax cuts in the first place. The first round took place in 2001 and the second, more significant round of cuts took place in 2003. Over the next 5 years, GDP increased at a faster rate. Tax revenues also increased at a faster rate and resulted in additional revenues of over $700 Billion, so claiming that they “cost” us $1 Trillion is a hollow arguement.

Finally, the simple truth is that we cannot tax our way out of our debt crisis. If you raised taxes on the top earners to 100% (ignoring the above facts, of course), it would still not even balance our budget, let alone put us in a position to actually pay down our debt. Increasing taxes on anyone, rich or poor, will only accelerate the downward spiral of our economy. The only solution is to dramatically reduce our spending. Let’s not pretend that it won’t be painful in some ways, because it will. But let’s also not pretend that it will hurt us more because Government spending does NOT drive the economy.

Government Spending

Government spending does impact economic activity, but only temporarily. Government spending may create jobs, but not sustainable ones. Why? Because the Government does not create anything. Unlike a private business, the Government does not create a product or service that “pays for itself”. The cost of Government services are borne on the backs of taxpayers. These services are not revenue generators, they are expenses from beginning to end and as the Government has proven over and over, they are extremely inefficient expenses. On top of that, the President has said that in his new plan, he will not touch Medicare, Medicaid or Social Security, which are the three biggest drivers of our debt. We won’t fix our problem and we won’t save those programs if we don’t make significant changes to them.

The Ryan Budget is much more realistic. The left is so busy demagoguing the issue that I won’t even attempt to debunk all of their false claims, but suffice it to say that almost everything coming from them about Ryan’s plan is completely baseless and untrue.

That said, even the Ryan budget is not perfect. What needs to happen is very simple:

You start by cutting everyone’s allowance by 10%. Nothing is off the table, not Medicare, Medicaid, Social Security or Defense. This is not optional, but a mandate.

Cabinet Members are given the task of prioritizing their department’s responsibilities as essential, important or non-essential.

They then are responsible for figuring out how to provide the same level of services with their reduced budget, just like in the business world. Whether it’s by maximizing efficiency, eliminating waste or by cutting non-essential programs (such as Harry Reid’s Cowboy Poetry Festival), the Cabinet Member responsible for each department can make that determination if for no other reason, they understand the inner-workings of their department better than Congress does.

If they are unable to do so, then barring a real, justifiable reason for failing in this task, they either come up with a plan to make it work or their replacements will.

The next step is to use the CBO analysis and the knowledge and experience of the Cabinet Members to identify the overlapping, duplicative programs and services that waste hundreds of billions of taxpayer dollars every year. These programs are then consolidated, streamlined, eliminated and/or returned to the States (who are the ones granted the authority by the Constitution for most of them and can administer them better than a “one size fits all” Federal solution).

Finally, we need to reform that tax code and in a big way. Ryan’s plan actually does that. The left talks about “tax cuts for millionaires and billionaires” but that is absolutely not true. It actually raises taxes for many in those groups by eliminating the loopholes that companies like GE and Google use to pay less in taxes than John Smith or Joe’s Corner Store Incorporated. The marginal rates are lowered accordingly so that it’s revenue neutral. The net result is a much more fair tax system. The small businesses and individuals on the low end of the “rich scale” actually pay less. The large corporations and the uber-rich pay more, but they don’t have to spend millions to take advantage of the loopholes that lower their tax base.

Ryan’s plan does this for both corporate and individual income taxes, but this is only a starting point. This gives us a much simpler place to start in addressing inequities in the tax code, by which we will strengthen and stabilize the tax revenue stream and in the process, our economy.

Corporate Taxes

One final thing. Yes, we need to lower corporate income taxes, and no, I am not saying that as part of a partisan, political, or social belief. Those that want to raise taxes on business don’t seem to understand that when they do so, they’re actually raising taxes on both Consumers and Workers. The cost of doing business, including taxes, is passed along in not only the prices we pay for goods and services, but also in the compensation paid to workers. When you raise taxes on a business, Consumers pay for it in the form of higher prices and Workers pay for it in the form of lower wages and benefits. The end result is that the lion’s share of that tax revenue is coming directly from the working class, which are the people that the “tax raisers” purport to represent. Hypocrisy, anyone? Or just ignorance?

High tax rates is also one of the primary reasons that companies take their business offshore. We have the highest corporate income tax rates in the world and yet we complain when companies take their business elsewhere? Are we really that stupid that we don’t understand the impact of a hostile business environment? We make it very expensive for companies to do business in this country with high taxes, burdensome regulation and high labor costs. Then we complain when they don’t create jobs and take their business elsewhere. Does that really sound like a logical argument?

Lowering corporate income tax rates will give business an incentive to do business here. More business in this country will increase tax revenues and will create jobs that we desperately need (which will create even more tax revenues). Historically, this has been proven time and time again, yet we insist on taking the path of the big social agenda. One would think that we need look no further than Europe to see the results of high taxes and big government spending.

What we need is to take a common sense approach. When your income is down and your debt is increasing, you reduce your spending. You don’t have the luxury of increasing your income with a snap of your fingers. You prioritize your expenditures and skip the non-essentials so that you can pay for your basic necessities. You don’t spend more and you don’t borrow more.

Our Government could learn a few things from the real world. The problem is, it will never happen, at least not anytime soon. The proposals I make here will not be attempted because they require courage and leadership from our President. Unfortunately, the President has shown that he either does not possess or does not intend to exhibit those particular qualities. It seems that he is too busy playing politics to realize that he is the President of the United States, not the President of the Democratic Party.


Photo Credit: janeb13

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