President Obama’s Predictable Budget: More Spending, More Tax Increases

Published April 23, 2013

President Obama tells us in the Overview to his Fiscal Year 2014 Budget just released last week that his budget proposes, “more than $2 in spending cuts for every $1 of new revenue from closing tax loopholes and reducing tax benefits for the wealthiest.”

But President Obama’s budget does not propose any spending cuts at all on net, not even reductions from expected increases in spending.  Instead, his budget proposes to add $160 billion in increased spending just next year to the projected growth in spending, even increasing spending for the current 2013 fiscal year by another $61 billion as well.  Over the next 10 years, President Obama’s budget proposes to add nearly $1 trillion to the projected growth in spending, proposing to increase annual spending by 2023 by $2.1 trillion as compared to 2012.

President Obama’s budget even proposes to cancel the sequester cuts, because he can’t bear to cut even 1% of federal spending from the growth in spending.  His budget proposes to spend $46.5 trillion overall over the next 10 years, even more than the Senate Democrat budget, the highest government spending in world history.

Indeed, President Obama’s talk of “spending cuts’ in his budget Overview is followed by pages of proposals for increased spending.  That reflects Obama’s basic thinking that what drives economic recovery and growth is increased government spending.  But Obama’s economic record is a thorough rebuttal to that thinking.  Not one of those increased spending proposals in his 2014 budget would contribute to increased economic growth and prosperity on net.

Still More Tax Increases

Besides these runaway spending increases, Obama’s budget also proposes $1.1 trillion in additional tax increases, on top of the $1 trillion in tax increases already going into effect this year under Obamacare, and the $600 billion in tax increases on the nation’s job creators, investors, and successful small businesses from the expiration of the Bush tax cuts for them in January.

Those new proposed tax increases include a doubling of the federal tax on cigarettes, in direct violation of the President’s campaign pledge not to increase taxes on singles making less than $200,000, and couples making less than $250,000, “in any form.”  It includes the so-called “Buffett Rule” doubling the top capital gains tax rate from when Obama entered office.  That would impose on America the fourth highest capital gains tax rate in the world, to go with effectively the world’s highest marginal corporate income tax rate.

Throughout his first term, and in this budget, President Obama has repeatedly claimed his policies have involved pro-growth tax cuts as well.  But all of his supposed tax cut proposals (with the exception of limited, increased, investment write-offs for small businesses) have involved tax credits rather than reductions in tax rates (which he has repeatedly increased).  But it is reductions in marginal tax rates that provide incentives for increased productive activity and growth, because it is the marginal tax rate, or the rate on the last dollar earned, that determines how much of the increased income resulting from increased productive activity the taxpayer is allowed to keep.

Tax credits do nothing to improve incentives for increased production.  They increase government control over the public by providing an effective government payment for some activity the government wants to direct the recipients to do.  But after the credit payment, taxpayers face the same economic incentives and tax rates as before.  Tax credits are consequently true tax expenditures, the equivalent of additional government spending rather than a tax cut.

Deficit Doubletalk

Despite all the tax increases, President Obama’s budget proposal would never balance the budget, by Obama’s own admission.  His own budget admits that after 10 years, the deficit would still be $439 billion, still about the highest in history before President Obama.  Congressman Paul Ryan’s House Republican budget, in sharp contrast, would balance the federal budget within 10 years, with no tax increases, as scored by CBO.

President Obama’s budget claims to reduce federal deficits by $1.8 trillion over the next 10 years.   But that only results from calculating the effect on deficits from an “adjusted baseline” used by the Obama budget, and not the CBO baseline.  That adjusted baseline assumes that the war in Afghanistan would never end without Obama’s proposed budget, and that we would otherwise be spending as much by 2023 fighting that war as during the recent War on Terror.  That adjusted baseline also does not include the sequester cuts under current law that the Obama budget would reverse, so the $1 trillion in increased spending resulting from reversing the sequester cuts as in Obama’s budget is not counted in the effect of Obama’s budget on the deficits.

If the impact on deficits under Obama’s budget is calculated from the projected deficits under current law or policies, then the net reduction in deficits proposed by President Obama’s budget is only a comparatively negligible $119 billion over 10 years.  That compares to deficit reductions of $5.7 trillion under Ryan’s budget as scored by CBO, almost 50 times as much.

President Obama’s own budget confesses to $5.3 trillion in additional deficits over the next 10 years, almost 5 times the deficits in Ryan’s proposed budget, which zeroes out the deficit entirely after 10 years.  Obama’s budget proposes to increase federal debt held by the public by $8.2 trillion over the next 10 years, 6 times what would result under Ryan’s budget.  Obama’s budget proposes to increase Gross Federal Debt to $25.3 trillion after 10 years, which would require increasing the national debt limit to that amount.  That Gross Debt would cross 100% of GDP, equal to our entire economy, in 2020.

Moreover, these results assume federal revenues more than double over the next 10 years.  That does not account for the likely result that Obama’s tax increases would not increase federal revenues as projected.  For example, in the last 45 years, every time the capital gains tax rate has been increased, capital gains revenues have declined rather than increased.  But Obama’s budget assumes that doubling the capital gains tax rate from when Obama entered office would nearly double capital gains revenues.

In addition, Obama’s budget assumes a suddenly booming economy to result from these policies, with real GDP growth in 2016, the end of his second term, at 3.6%, more than four times the average of his first term.  That is highly unlikely, given that all of his policies are decidedly anti-growth, such as rocketing tax rates, explosive government spending, exploding regulatory burdens, costs, and restrictions, and cheerleading political cover for the Fed’s unanchored, ultimately destabilizing monetary policies.

At the same time, Obama’s budget inconsistently assumes sustained negligible interest rates (1.2% in 2016).  That is further incompatibly assumed with sustained minimal inflation (2.2% in 2016), leaving real interest rates woefully negative at -1%.  Given the Fed’s current policies, a rapidly growing economy would likely mean surging inflation and soaring interest rates.  Both would raise spending, deficits and debt sharply as well, as federal interest expense is already projected in Obama’s budget, with the lowest interest rates in history, to be $763 billion (more than three quarter trillion) in 2023 alone.

Obama’s budget consequently assumes that there will not be another recession within the next 10 years, though some predict that Obama’s anti-growth policies will cause another recession as early as this year.  That would cause revenues to collapse, spending to soar further, and deficits and debt to further explode.  The second great vulnerability of the Obama, and Senate Democrat, budgets is the potential for soaring interest rates, as market rates spike out of the Fed’s control, after the longest period of near zero rates in U.S. history.  With national debt approaching $20 trillion or more, sharply increasing interest rates would be extremely costly.

With these assumptions, the deficit and debt projections in Obama’s budget cannot be taken seriously, and most likely will turn out to be grossly underestimated.

Entitlement Reform Charade

President Obama has his propagandist flacks out there touting his supposed entitlement reforms in this budget as a grand gesture of compromise with Republicans.  But there is no real entitlement reform of any significance in Obama’s budget at all.

Obama has gone back to proposing to cut promised benefits for seniors again, by arbitrarily changing the cost of living adjustment formula to reduce Social Security benefits by $130 billion over the next decade from what they would be otherwise.  The argument that the new formula more accurately measures inflation is fallacious.  The most accurate inflation formula depends on what you are trying to calculate.  If you are trying to calculate how what consumers must pay for a fixed basket of goods and services changes over time, arguably even the currently used inflation index understates inflation.

Ten years ago, when President Bush was giving at least rhetorical support to the idea of personal accounts for Social Security, I argued against those who were still arguing for cuts in Social Security benefits by noting that no such cuts would ever be allowed by liberals without tax increases as well.  President Obama is now proving me right about that all along.

Obama’s proposed change to the Social Security inflation index would produce tiny, negligible reductions in runaway Social Security spending increases, especially as compared to personal accounts.  Over a generation, depending on how big the personal account option was and how many workers exercised it, such accounts would shift Social Security benefits entirely off of the federal budget, to private savings, investment and insurance instead, resulting in higher rather than lower benefits for those seniors who individually did choose the accounts.  That would ultimately mean the biggest reduction in government spending in world history, equal to about 10 percentage points of GDP, if the option was ultimately expanded to all Social Security and Medicare payroll taxes, given ultimate projections of currently payroll tax financed benefits.

Obama’s proposal, by sharp contrast, would only reduce Social Security spending increases by one-fourth of one percent.  Even with Obama’s “reform,” his own budget projects Social Security spending to soar over the next decade by 85%, from $768 billion last year to $1.427 trillion in 2023.

But Obama’s change in the Social Security inflation index would also apply to the index adjusting income tax brackets for inflation.  That would mean still another tax increase of $100 billion over the next 10 years, which would also apply to the middle class and working people as well, again in direction violation of Obama’s campaign promise not to raise taxes on such taxpayers “in any form.”

The only real entitlement reform solving all the problems of Social Security is to shift to a fully funded system based on real savings and investment, with zero unfunded liabilities.  That is what personal accounts do.

Obama’s other big, supposed compromise, entitlement “reform” is to again cut Medicare payments to doctors and hospitals serving seniors by another $250 billion over the next 10 years, in addition to the Obamacare cut of three quarters of a trillion in such Medicare cuts, making a nice round trillion in such Medicare cuts altogether.  While Democrats talk such a good game of Republicans wanting to slash and burn Medicare, it is Obama and the Democrats who have already done it.  And now they are celebrating doing it again.

Imagine what would happen to our national defense if the government refused to pay the builders of the Navy’s ships, the manufacturers of the Air Force’s planes, and the makers of the Army’s tanks.  That is what is going to happen to health care for seniors under Medicare, given Obama’s so-called “reforms.”

Real Medicare entitlement reform would involve expanding the more modern and successful Medicare Parts C and D to the old-fashioned Medicare Parts A and B, which is all that House Budget Committee Chairman Paul Ryan has proposed.  Seniors would get better benefits than under Obamacare’s Medicare with those real reforms, at major savings to taxpayers due to market competition and incentives, as we have already experienced under Medicare Parts C and D.  Those reforms would “end Medicare as we know it” only to the extent that C and D are not part of the alphabet.

The last successful, cost-saving, entitlement reform was the bipartisan 1996 welfare reforms of the old, New Deal, AFDC program.  Under the incentives of those reforms, two thirds of those dependent on the program left the rolls, with their incomes documented to increase by 25% as a result.  Yet, taxpayers saved 50% of the costs of the program after 10 years, compared to where it would be otherwise under prior trends.

Real entitlement reform would involve expanding those President Clinton compromising reforms to the rest of the nearly 200, federal, means tested welfare programs, projected to cost $10 trillion over the next 10 years.  CBO has scored such reform applied to just one program, Medicaid, as saving nearly $1 trillion over 10 years, while possibly vastly expanding access to health care for the poor, to their great benefit.  But there is exactly zero compromising leadership from President Obama on such reform.

Real entitlement reform would involve providing health care for all unlike Obamacare (still scored by CBO as leaving 30 million uninsured after 10 years – a gross underestimate) with the reforms proposed by John Goodman and myself in , “Health Care for All Without the Affordable Care Act [Obamacare],” NCPA Issue Brief No. 116 (October 17, 2012).  Those reforms would assure universal health care with no individual mandate and no employer mandate, at a savings to taxpayers of at least $2 trillion over the next 10 years alone.  But there is exactly zero compromising leadership from President Obama on such reform.

What’s It All About

Federal law requires President Obama to propose a budget for the next fiscal year by February 4 of each year, before the House and the Senate adopt their own budget resolutions.  But President Obama released his budget for next year just last week, after the House and the Senate had already adopted their budget resolutions.  So what is the point of the President issuing a budget proposal now?

The point is to simply posture for all those low information, Twitter voters in the 2014 elections, who will hear only from all the Democrat Party propagandists at the New York Times, the Washington Post, and MSNBC and brethren.  They will hear only about President Obama’s “spending cuts,” his grand, compromising, entitlement reforms, and how he is fighting for the middle class, with declining median incomes throughout his Administration, for the poor, with record, soaring poverty, and for “equality,” even as inequality has actually risen throughout his Administration.  Is this generation of Americans in the process of proving America’s more than 200 year experiment with democracy a failure?

[First Published at Forbes]