I. Taxes and Deficit Reduction (continued)
President Obama’s foray into deficit reduction is bewildering, to say the least. As indicated previously, he did not make it a focus in his presidential campaign, mentioning it chiefly in relation to ending the Bush tax cuts. The first two fiscal year budgets he has submitted reflect little in the way of deficit reduction and the FY 2011 budget has a projected deficit of $1.65 trillion, with next year’s budget projected to run a deficit of over one trillion dollars.
Under President Obama;s 10-year plan submitted with the FY 2012 budget, the U.S. would need to borrow $7.2 trillion through 2021, down from the FY 2011 budget’s 10-year projection of $9 trillion of borrowing.
After Rep. Paul Ryan (R-WI) presented his long-term budgetary plan, which would make radical changes in how Social Security, Medicare and Medicaid are funded and operated, President Obama came out with a 12-year budgetary plan, focused much more on deficit reduction than his prior 10-year budgets had been. Obama proposed to reduce the deficit by $4 trillion by cutting non-military domestic spending by $2 trillion — some of which would build on cuts in the FY2011 budget — and raising revenue by $1 trillion, focused almost exclusively on eliminating tax benefits for the wealthiest Americans.
The base Pentagon budget would be cut by $400 billion; however, since President Obama had requested nearly $6.5 trillion for the Pentagon over 10 years in his FY 2012 budget released on February 14, 2011, a $400 billion cut amounts to a six percent cut over 10 years of projected spending.
Obama’s use of a 12-year period is unusual in itself, since future budgetary projections had customarily been limited to 10 years. An explanation for the 12-year period may be that Obama back-loaded the spending cuts into the last six years of the plan, so that even if he is reelected in 2012, the pain of the cuts will be experienced after Obama has left office.
Turning now to a debt ceiling focus on the Obama presidency, he blundered when he allowed himself to be trapped into linking spending and taxes to the issue of increasing the debt ceiling. Under Ronald Reagan the debt ceiling was raised 18 times and under George W. Bush it was raised seven times. At none of those times did the Democrats nor the Republicans try to link spending and taxation changes as preconditions for raising the debt ceiling.
Once President Obama entered the intense conflict over raising the debt ceiling, he insisted on a balanced approach — called “shared sacrifice” — between spending cuts and tax increases to get the nation to a more manageable deficit situation. If balance is defined as having both sides of a scale bear an equal weight, Obama quickly created an imbalance in which spending cuts greatly exceeded increased revenue. Obama had previously created an image as being an unskilled negotiator who makes significant concessions even before the negotiations start. Thus, the common assumption became that Obama was offering $3 dollars in spending cuts for every $1 in increased revenue.
This three to one imbalance was in existence even before President Obama suddenly announced that cuts in Social Security, Medicare and Medicaid were on the table. Throwing these signature national programs on the bargaining table further widened the gap between spending cuts and tax increases; also, his action caused great unease among congressional Democrats.
On July 21, 2011, the media erupted in accounts of a near-agreement between House Speaker John Boehner and President Barack Obama. The reported agreement reportedly called for $3 trillion in spending cuts over 10 years and heavily focused on cuts in Social Security, Medicare and Medicaid; however, tax increases would not even be considered until 2012 at the earliest. Upon hearing news of the pending deal, Senator Barbara Mikulski (D-MD) said that the caucus of Democratic senators turned “volcanic,” as senators expressed their intense anger at what Obama seemed prepared to do. Speaker Boehner later repudiated the deal.
Very late in the convoluted battle over raising the debt ceiling, a committee composed of three Republican and three Democratic U.S. senators — dubbed the “Gang of Six” — released a four-page outline of some deficit reduction items to pursue. President Obama quickly endorsed the plan as “broadly consistent” with his own approach. If the plan was “broadly consistent,” than Obama had been grossly misrepresenting his own approach for some time.
The “Gang of Six” plan would replace the current tax rate schedule with a three-tier structure, with the top rate ranging from 23 to 29 percent. Obama had repeatedly railed against giveaways to millionaires and billionaires in the Bush tax cuts; however, Obama was prepared to give the wealthiest Americans an even more generous break from the current 35 percent tax rate. It is like the Bush tax cuts on steroids.
During the presidential campaign, Barack Obama said, “Senator McCain will cut Social Security, I will not.” Furthermore, after Obama put Social Security on the table in the debt ceiling talks, he reportedly assured angry Democrats in Congress that he would not cut benefits for current Social Security beneficiaries. Yet because the “Gang of Six” plan outline calls for deep cuts in Social Security to take place in the next 10 years, Obama broke a firmly stated campaign vow and also violated a pledge to members of his own party.
Another specific that is in the “Gang of Six” plan is the elimination of the Alternative Minimum Tax (AMT).The purpose of the AMT was to recover some tax revenue from those wealthy individuals and profitable corporations who would otherwise escape paying federal income taxes. Thus, by endorsing the elimination of the AMT, President Obama was providing another tax gift to the rich and powerful.
Since the AMT is not indexed to inflation, increased numbers of the middle class become subject to it every year — Congress customarily applies fixes to the AMT to prevent more taxpayers from becoming subject to it.
Because it is difficult to forecast how many taxpayers will become subject to the AMT in the near future, estimates of the revenue loss from its elimination can vary widely. Writing in the July 2011 Washington Wire, David Wessel says its elimination would reduce revenue by $1.7 trillion over 10 years. However, the Center on Budgetary and Policy Priorities puts the 10-year revenue loss in the wide range of $800 billion to $1.5 trillion. Thus, even at the low estimate, doing away with it would produce a severe revenue loss.
Endorsement of the “Gang of Six” plan wasn’t President Obama’s last change of position on long-term deficit reduction. When Senate Democrats announced a 10-year plan bearing the name of Senate Majority Leader Harry Reid, President Obama hurriedly endorsed the plan. The Reid plan called for $2.7 trillion in spending cuts, with $1 trillion to come from winding down the wars in Iraq and Afghanistan. No cuts were proposed for Social Security, Medicare and Medicaid.
There was no explanation if Obama had abandoned his 12-year plan, nor if the previously proposed $400 billion cut in military spending would be in addition to the $1 trillion cut.
On September 19, 2011, President Obama announced spending cuts and tax increases for yet another 10-year plan.
To summarize President Barack Obama’s transformation into a deficit hawk: He exhibited little interest in deficit reduction for the first two years of his presidency.Tthe sole significant deficit reduction measure was a $178 billion cut in military spending through 2015. Then, after Rep. Paul Ryan unveiled his long-term budgetary package, Obama responded with a 12-year plan featuring domestic discretionary spending cuts that would more than double the $400 billion in military spending cuts. Social Security, Medicare and Medicaid were left untouched.
As Obama was drawn deeper into the debt ceiling debacle, he offered further spending cuts and then put Social Security, Medicare and Medicaid on the table. When the “Gang of Six” U.S. senators offered an outline of proposed long-range spending and taxation changes, President Obama quickly endorsed it. Through his endorsement, Obama sanctioned a 23 to 29 percent top marginal tax rate, accepted the proposed elimination of the Alternative Minimum Tax; and he also accepted a deep cut in Social Security.
Obama also endorsed the Reid plan’s exclusion of any cuts in Social Security, Medicare and Medicaid; also, he accepted a cut in military spending that was more than double what he had proposed in his 12-year plan.
On September 19, 2011, President Obama unveiled yet another long-range budgetary plan. Social ;Security was left out of the mix; however, there were to be sharp cuts in Medicare and Medicaid, to be achieved largely by cutting what providers would be paid.
Additional revenue was to be gained by ending the Bush tax cuts for the wealthy and ending subsidies and closing loopholes benefiting the wealthy.
The above represents a rather astonishing series of changes in position in about a six-month period.
The next blog will focus on why the American people are not being overtaxed by the national government. It will also propose a new tax structure which will add more tax brackets at the top end but also adjust the tax brackets at the lower end.