Obama’s Budget: The Decline and Fall of the American Economy
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published February 17, 2012 on Forbes.com.
President Obama’s budget released Monday embodies his policies for economic growth and recovery. The document, including the President’s accompanying budget message, makes those policies quite clear. If you think the key to economic growth and prosperity is increased government spending, financed by increased tax rates on job creators, investors and small business, with sustained record deficits and soaring debt, then President Obama is your man. If you think that is nuts, then what the budget says to you is your only choice is to get him out of office.
You would think that President Obama would have learned from his experience over the last three years that such economic policies don’t work. But what we have learned from our experience with President Obama is that he doesn’t learn from experience. He is all theory, inculcated in him from birth.
Obama explains in his budget message,
“To succeed and thrive in the global, high tech economy, we need America to be a place with the highest-skilled, highest-educated workers; the most advanced transportation and communication networks; and the strongest commitment to research and technology in the world. This budget makes investments that can help America win this race, create good jobs, and lead in the world economy.”
In other words, in plain English, what drives economic recovery and growth is government spending. And Obama follows through on that in his new budget, with federal spending for 2012 projected to total $3.795 trillion, an increase of over 27% during his first term alone, up another $193 billion from the last year. In fact, the President’s own proposed budget projects federal spending to soar by 2022 to $5.820 trillion, the highest government spending in world history. Over the next 10 years, federal spending, with all of President Obama’s talk about spending cuts, will total $47 trillion!
When he was running for President in 2008, however, Obama did not say that increased government spending was the key to economic growth and his economic policies. He told us then his budget policy would involve a “net spending cut.” In fact, he said precisely that during a nationally televised Presidential debate with John McCain. Does President Obama understand the meaning of the words “net spending cut?” Or was he deceiving the American people in 2008 when he used those words?
President Obama also promised when he was running for office in 2008 that he would cut the budget deficit in half by the end of his first term. But the budget deficit projected for 2012 in the budget he just released is $1.327 trillion. The deficit in 2008 was $458.6 billion, less than half one trillion, the former all time record. As the Wall Street Journal explained yesterday, Obama’s new budget includes: “Another deficit of $1.327 trillion in 2012, also an increase from 2011, and making four years in a row above $1.29 trillion. The last time that happened? Never.”
Those four consecutive years of trillion dollar deficits under President Obama, the only trillion dollar deficits in world history, added a total of $5.33 trillion to the national debt held by the public in President Obama’s one term in office alone. Obama’s own budget projects the national debt held by the public to total $11.6 trillion for 2012, double the national debt of $5.8 trillion in 2008! Consequently, by Election Day 2012, Obama will have doubled the national debt, in just one term of office. In that one term, he added as much to the national debt as all prior Presidents, from George Washington to George Bush, combined!
By 2022, Obama’s own budget projects that national debt held by the public to total nearly $20 trillion! That would be the highest national debt in world history. The gross federal debt, which includes the money the taxpayers owe in the Social Security trust fund and similar federal debts, which will also have to be paid, is projected in Obama’s own budget to total nearly $26 trillion by 2022! That is projected to be just over 100% of GDP that year.
All of those deficits and all of that national debt Obama projects in his own budget include all of the tax increases he proposes, or has already enacted to go into effect under current law. His budget projects that federal income tax revenues will double by 2020, federal corporate tax revenues will double by 2017, and federal payroll taxes will double by 2022.
That is because already enacted under current law for 2013 are increases in the top tax rates for virtually every major federal tax. In that year, the tax increases of Obamacare go into effect, and the Bush tax cuts expire, which Obama refuses to renew for the nation’s small businesses, job creators and investors. That is the English translation of individuals making over $200,000 a year, and couples making over $250,000 per year.
As a result, if the Bush tax cuts simply expire for these higher income earners, the top 2 income tax rates will go up by nearly 20%, the capital gains tax rate will soar by nearly 60%, the tax on dividends will nearly triple, the death tax rate will rise by nearly a third, and the Medicare payroll tax will explode by 62% for these targeted taxpayers.
Obama explains these tax policies in his budget message, saying “everyone must shoulder their fair share,” and “we need an economy where everyone shoulders their fair share to put our fiscal house in order.” The taxpayers targeted for these tax increases are the top 3% of income earners. But as the Wall Street Journal noted Tuesday, those top 3% pay more in federal income taxes than the bottom 97% combined! So if that is not their fair share, what would that fair share be, Mr. Obama?
Before President Obama was even elected, in fact, in 2007, official IRS data shows that the top 1% of income earners paid 40.4% of all federal income taxes, almost twice their share of income. That was already more than paid by the bottom 95% combined. The top 5% of income earners paid 60% of all federal income taxes. The top 10% paid 70%.
By contrast, the bottom 40% of income earners as a group paid no federal income taxes. Instead, they received net payments from the income tax system equal to 3.8% of all federal income taxes. In other words, they paid negative 3.8% of federal income taxes. The middle 20% of income earners, the actual middle class, paid 4.7% of all federal income taxes.
This was after more than 25 years of supply-side Reaganomics cutting tax rates! The share of federal income taxes paid by the top 1% was 17.6% in 1981, when President Reagan brought his supply side economics to Washington. After a quarter century of rate cuts, that share had more than doubled by 2007, as indicated above. That is because with the lower tax rates, incomes boomed along with the economy, and high income taxpayers had the incentives to pull their money out of tax shelters and invest it in the real economy, fueling the boom while increasing their reported incomes. That is why Jack Kemp always used to say if you want to soak the rich, cut tax rates.
President Obama explained in his budget message, “a teacher, a nurse, or a construction worker who earns $50,000 a year should not pay taxes at a higher rate than someone making $50 million. It is wrong for Warren Buffett’s secretary to pay a higher tax rate than Warren Buffett.” Agreed, it would be wrong if it were true. That is why conservative Republicans propose a flat tax, where everyone pays the same rate, and “everyone plays by the same rules,” to use the President’s words. But it is President Obama and his fellow Che Guevara Democrats who oppose that most fair, and pro-growth of all tax systems, which would maximize jobs, wages and incomes for working people.
President Obama is just playing you with this central campaign theme that the rich don’t pay their fair share of income taxes, and the middle class and working people are left to pay all of them instead. The truth is more nearly the opposite, with the rich paying nearly all of the income taxes.
The truth obscured by this calculated deception is the multiple taxation of capital in our tax system. The earnings from capital investment are taxed not once, but multiple times. First, by the corporate income tax, then again by the individual income tax through the tax on dividends, then if you sell the capital investment, through the capital gains tax (which taxes the increase in the present value of the future income stream to the investment, which will be taxed again when earned), then when you die, by the death tax. Consequently, the 15% capital gains tax rate is not the only tax that Warren Buffett actually effectively pays on his investment income. This is how the rich end up paying such a large share of the income tax burden, as discussed above.
But Obama figures that enough of you and your friends and neighbors won’t know that, and the Democrat controlled media won’t tell them. So he figures he can get away with effectively looting “the rich” (a crass term), as his Marxist ideology dictates.
All of the above Obama tax rate increases going into effect in 2013 under current law are on top of virtually the highest corporate tax rate in the industrialized world, at nearly 40% counting state income taxes, which leaves American companies uncompetitive in the global economy. Yet, under Obama not only is there no relief in sight, his budget includes still further tax increases, which are also already included in the projections of deficits and debt. He proposes the so-called Buffett rule involving a 30% minimum tax rate for upper income earners, which would increase the capital gains tax rate by 100%. He proposes to restrict deductions further for higher income earners. He proposes further tax increases on banks, oil and gas, and still other tax increases on business.
If President Obama’s extremist left wing rhetoric is not successfully countered, and he sells the nation his phony picture of reality, it is working people and the middle class that will suffer the most. That is because if we try to shift even more of the tax burden onto the nation’s job creators and investors, it is working people and the middle class that will lose jobs, wages and incomes. That is why America is suffering a capital strike, with no real, long overdue recovery, extended unemployment to rival the depression, declining real wages and incomes, and more Americans in poverty than at any time in American history.
In fact, if President Obama’s comprehensive tax rate increases are not averted, the result will be revenues falling far short of projections, or even declining further, and deficits and debt increasing even more, rather than declining as Obama wrongly projects. For over 40 years now, and possibly more, every time the capital gains tax rate has been increased, revenues have declined. Every time it has been cut, revenues have increased.
When former House Speaker Newt Gingrich joined with President Clinton to enact a capital gains tax rate cut in 1997 from 28% to 20%, capital gains tax revenues increased by $84 billion over the pre-tax cut projections for 1997 to 2000. Despite an almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999. Similarly, for the Bush cut in the capital gains rate in 2003 from 20% to 15%, capital gains revenues increased by $133 billion from 2003 to 2006, as compared to the pre-tax cut projections. Revenues from the taxation of dividends rose as well after Bush slashed that rate in 2003 also.
If Obama now reverses those rate cuts, the result will be the opposite as well, with revenues declining rather than rising, which will increase rather than reduce federal deficits and debt. In fact, if Obama’s comprehensive rate increases for 2013, along with his soaring regulatory burdens and counterproductive monetary policies, produce a second, double dip recession in 2013, as I predict in my recent publication Obama and the Crash of 2013 (Encounter Books), federal revenues across the board will decline, and deficits and debt will soar further. As the Wall Street Journal also said Tuesday, “A central contradiction of this [budget] plan is that the White House predicts accelerating real GDP growth of 3% in 2013 and 4.1% by 2015 even as the economy is whacked by these tax increases.”
Finally, the above discussed levels of federal spending, deficits and debt include sharp reductions in future federal defense spending. That includes enormous savings from withdrawing troops from Iraq and Afghanistan. The President also cuts missile defenses, and fails to modernize our aging, outdated nuclear deterrent, while our top nuclear rivals China and Russia do. The U.S. Navy is cut back to the levels before World War I. Troops, ships, and planes are reduced, and modernizations are put on the shelf.
Yet, even with these draconian defense reductions, America still suffers the above discussed Grecian formula explosion of federal spending, deficits and debt. The President not only fails to propose any serious entitlement reform, he scorns serious reform proposals that would actually benefit seniors and the poor, while our national defenses are threatened. The President’s new defense strategy suited to his defense budget cuts drops the longstanding American defense doctrine of maintaining the ability to fight two major conflicts, or two and half, at the same time. We are now only to maintain the forces to fight one major conflict. That means as soon as we are drawn into any such conflict, we are vulnerable to attack from another enemy, in fact inviting it. While Reagan gave us peace through strength, Obama is on the road to war through weakness.
All of these issues will be framed precisely for the voters in March, when House Budget Committee Chairman Paul Ryan will produce the GOP budget. Unlike President Obama’s budget, that Ryan GOP budget will include tax reform, entitlement reform, adequate national defense, and sharp reductions in deficits and the growth in federal debt, sufficient to solve America’s fiscal crisis.