The Age of Unreason: Senate Democrat Budget Mythology
This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published March 31, 2013 on Forbes.com.
Paul Ryan’s House Republican budget, and Patty Murray’s Senate Democrat budget, deserve continued scrutiny and debate, because they do definitively display the core beliefs of the two parties on a wide range of issues. That includes crucially taxes, and the foundations of economic growth and prosperity.
But the fallacies in the Senate Democrat budget include not even remotely understanding the House Republican budget. For example, the Senate budget states that the House Republican budget shows that, “They believe that we should make massive cuts to education, health care, and other investments that benefit the middle class, seniors, and the most vulnerable families.”
But the House Republican budget makes absolutely no cuts to anything. It continues to grow government spending every year. After 10 years under Ryan’s budget, by 2023, the federal government would be spending $1.4 trillion more in that year than it would in 2014. Ryan’s Republican budget proposes to spend $41.5 trillion over the 10 year budget window. Obviously, any talk of massive cuts in this budget could not be more silly, inexcusable and irresponsible.
True, even this spending is not nearly enough for the Senate Democrats. They propose to spend $47.2 trillion over the 10 year budget window, and by 2023 would be spending another $733 billion more than the Ryan Republican budget that year. Ryan’s budget only cuts the growth in spending, but spending continues to grow, across the board, including a 70% increase in spending over the 10 years on Medicare, which the Senate Democrat budget says Ryan proposes to dismantle, a 67% increase in Social Security, and a 21% increase in Medicaid. Obviously, the Senate Democrat budget cannot even discuss the House Republican budget intelligently.
On taxes, the Senate Democrat budget says the House Republican budget shows that “they think the wealthiest Americans and biggest corporations shouldn’t be asked to pay their fair share. In fact, recent Republican proposals have actually cut taxes for the rich and asked middle class families to pick up the tab, a policy position that is far outside the mainstream of how the American people believe we should approach this.”
Shouldn’t be asked to pay their fair share? Who is asking? Internal Revenue Service (IRS) data, compiled from income tax returns, as reported by the Congressional Budget Office (CBO) shows that in 2009 the top 1% of income earners paid 39% of all federal income taxes. That was three times their share of national income at 13%. It was also more than double the 17.6% of federal individual income taxes paid by the top 1% when President Reagan entered office in 1981, and his historic tax rate cutting began.
Yet, the IRS data also shows that in 2009 the middle class, as represented by the middle 20% of income earners, paid just 2.7% of all federal income taxes as a group on net, while earning 15% of the national income. As a result, the top 1% paid almost 15 times as much in federal income taxes as the entire middle 20%, even though the middle 20% earned more income.
And this was before all the tax rate increases on “the rich” at the beginning of this year. With the expiration of the Bush tax cuts only for “the rich,” and the Obamacare tax increases going into effect, top federal income tax rates on the rich rose nearly 20%, the tax rate on capital gains rose nearly 60%, the tax rate on dividends rose nearly 60%, the Medicare payroll tax rate rose 62%, and the death tax was permanently restored.
Moreover, the bottom 40% of income earners as a group on net, instead of paying some taxes to support government programs, services and benefits, were paid cash by the IRS in 2009 equal to 10% of all federal income taxes that year.
The official IRS data also shows that in 2009 the top 20% of income earners, which included those earning more than $74,000, paid 94% of federal individual income taxes. That was 85% more than the share of national income they earned, almost double. The selfish bastards in that top 20% earned just over half of all the income in the country at 51%. Is it fair that they earn so much more than the bottom 20%, which earned almost nothing? Well, that’s what happens when the top 20% includes nearly 6 times as many full time workers as the bottom 20%.
The top 20% also includes the majority of Americans with advanced graduate and professional degrees. And the most work experience. If they would just party till they drop, like so many others, we wouldn’t have so much inequality. And America would look a lot more like Argentina, or maybe Cuba.
Obviously, “the rich,” a crass term that has no place in responsible politics, pay much more than their fair share. And the Senate Democrat budget can’t discuss tax policy intelligently either.
Recent Republican proposals have cut taxes on the rich and asked the middle class to pick up the tab? When was the last time any Republican proposed to increase taxes on the middle class? It was 30 years of Reagan Republican tax policy that cut taxes on the middle class reducing the share of the income tax burden paid by the middle 20% to just 2.7% of the total income taxes, while earning 15% of the income. And it was Reagan Republican tax policy that abolished income taxes on the bottom 40%, with the IRS paying them rather than taxing them.
It was, in fact, Ronald Reagan who first proposed in the 1970s what became the Earned Income Tax Credit (EITC) that has done so much to reduce income tax liabilities for lower income people, in his famous testimony before Russell Long’s Senate Finance Committee in 1972. As President, he cut federal income tax rates across the board for all taxpayers by 25%, including for the middle class, working people, and the poor. He also indexed the tax brackets for all taxpayers to prevent inflation from pushing working people into higher tax brackets. In the Tax Reform Act of 1986, he reduced the federal income tax rate for the middle class all the way down to 15%. That Act also doubled the personal exemption, shielding a higher proportion of income from taxation for the middle class and below than for “the rich.”
Newt Gingrich’s Contract with America adopted a child tax credit of $500 per child that also reduced the tax liabilities of lower income people by a higher percentage than for higher income people. President Bush doubled that credit to $1,000 per child, and made it refundable so that low income people who do not even pay $1,000 in federal income taxes could still get the full credit. Bush also adopted a new lower tax bracket for the lowest income workers of 10%, reducing their federal income tax rate by 33%. He cut the top rate for the highest income workers by just 11.6%, from 39.6% to 35%.
We just went through a national debate at the turn of the year about extending “the Bush tax cuts for the middle class.” Those tax cuts for the middle class were adopted by a Republican Congress in 2001, with virtually all Congressional Democrats at the time voting against them. For all those “low information” commenters out there, these are established facts over which reasonable people cannot differ.
Now Paul Ryan continues this long established Republican policy of cutting taxes for the middle class and working people, by proposing tax reform in the House Republican budget that would cut the income tax rate for families making less than $100,000 a year to 10%. And the Republican House majority passed that proposed Ryan budget, with all House Democrats voting against it again as well.
It is changes to federal income taxes that are being debated today, and so it is the relative shares of who pays what of those taxes that are relevant to that debate. But even if all federal taxes are considered, again according to official IRS data, in 2009 the top 1% paid over 22% of all federal taxes, while earning 13% of the income. That is down under Obama from the nearly 27% of all federal taxes paid by the top 1% achieved by Reaganomics in 2007.
Moreover, in 2009 the top 20% paid nearly 70% of all federal taxes, while earning 50% of the income. The middle 20%, the true middle class, paid 9% of federal taxes, compared to their 15% share of income. The top 1% alone paid well over twice the total federal taxes as the entire middle 20%, while earning less in income. The bottom 20% paid 0.3% of all federal taxes. And again, this is before all the tax increases on top income earners adopted at the start of this year.
Moreover, the Left is again grievously in error in thinking the maximum taxable income for the Social Security payroll tax of $113,700 is a loophole for the rich. Social Security benefits are calculated based on the worker’s income history. Only the income on which the worker paid taxes is counted towards benefits.
So the limit is not an unfair loophole. Workers don’t pay taxes on income above the limit, but they don’t get benefits for that income either. That is because Social Security is a contributory program that only replaces a floor of wage income in retirement. Once your retirement income is above that floor, there is no good reason to force taxpayers to pay more for higher benefits. That is especially because Social Security pays such poor, below market returns on tax payments into the program, actually negative real returns for higher income workers. So why force a worker to pay more for a negative real rate of return? It doesn’t even help to close the long run Social Security deficit, because more benefits would be owed in the future in return.
Finally, the Senate Democrat budget blares several times, “The highest priority of the Senate Budget is to create the conditions for job creation, economic growth, and prosperity built from the middle out, not the top down.” But the Senate has been under Democrat control going into its seventh year by now, and Obama has been President going into his fifth year by now. So where is that job creation, economic growth and prosperity, built from the middle out?
The central economic policy of the Senate Democrat budget is that increased government spending is what promotes economic growth and prosperity. But contra to even Keynesian economics, increased taxes are no problem for the Senate Democrats. That is why the Senate Democrat budget, which the Senate Democrat majority has now passed, includes yet another trillion dollar tax increase, the third major tax increase this year, in only the third month of the year.
But under precisely these policies, not only have we gotten no robust job creation, and no robust economic growth, but middle class incomes have been plummeting rather than rising. Since President Obama entered office in January, 2009, real median household income has declined by about $4,500, or 8%. That’s the equivalent of losing one month’s income every year.
Even if you start from when the recession ended in June, 2009, the decline since then has been greater than it was during the recession. Three years into the Obama recovery, median family income had declined more than 5% by June, 2012 as compared to June, 2009. That is twice the decline of 2.6% that occurred during the recession from December, 2007 until June, 2009. As the Wall Street Journal summarized in its August 25-26, 2012 weekend edition, “For household income, in other words, the Obama recovery has been worse than the Bush recession.”
The Senate Democrat economic growth model fails to take into account double entry bookkeeping. Increased government spending on anything can only be financed by drawing equivalent resources out of the private sector, by either increased borrowing or increased taxes. Since resources tend to be used more productively in the private sector, increased government spending tends to amount only to a net drag on the economy. Even more so counting the negative incentive effects of the increased taxes.
The Senate Democrat budget touts increased spending on “infrastructure, education, job training, and innovation.” But the economy’s stagnation is not due to inadequate infrastructure, and in any event we tried increased infrastructure spending in Obama’s failed, nearly $1 trillion, so-called “stimulus” when he first entered office. Education spending is also already at an all time high.
Moreover, the history of federal job training programs is that the federal government is always way behind the curve regarding what workers need to be trained for, producing newly trained workers with skills that are already obsolescent. The four dozen federal job training programs have not led to economic growth and prosperity. “Innovation” just refers to Obama’s failed crony capitalist favoritism and bailouts that have produced spectacular failures and drains on hard earned taxpayer funds.
So who is the better champion of the middle class? As the Bible says, “By their fruits you shall know them.”