Obama’s Sideshow Budget Will Yield Little Real Fiscal Progress

By :: February 14th, 2011

The Obama budget confirms what we already knew—neither tax reform nor significant increases in revenues are on the table. Neither are major entitlement programs such as Medicare and Social Security. The coming budget debate will be fought over a small sliver of spending. This is ground where Republicans feel quite comfortable and Democrats do not.

But as this chart shows, spending is in fact only half of the story. And the spending that both President Obama and the congressional GOP want to target is not only a tiny share of federal outlays, it has been growing more slowly than programs such as Medicare, Medicaid and Social Security, which appear to be exempt from budget cutting.

Mostly due to one-off responses to the Great Recession, such as TARP and the stimulus, all spending as a share of Gross Domestic Product ballooned in 2009-10. While spending will slowly fall over the next couple of years—thanks to an improving economy, the merciful end to various government bailouts, and President Obama’s proposed spending freeze for some domestic programs, overall outlays would settle in at about 23 percent of GDP through the end of the decade according to Obama’s fiscal plan.

That’s too high, especially since most costs of the aging Baby Boomers won’t have kicked in yet. But having a bloody battle over 12 percent of spending is something like the management of a bankrupt company using all of its energy to cut the travel budget, instead of trying to figure out why customers stopped buying its products.

Despite wild claims from some on the political right, taxes as a share of the economy in the first two years of the Obama Administration have hovered at less than 15 percent of GDP. That’s their lowest level since the early 1950s. Taxes in fact are far lower today than during Ronald Reagan’s presidency. You could look it up (or look at the chart)

Some of this was due to the rotten economy. But some has been thanks to tax policy over the past couple of years. Not only did Obama extend the Bush-era tax cuts through next year, but he’s convinced Congress to enact some targeted reductions of his own. Among them: a more generous Child Credit, a more expansive Earned Income Credit, a Making Work Pay Credit, generous tax breaks for companies that buy new equipment this year, and the payroll tax holiday enacted last December (which replaced the work credit).

In today’s budget proposal, Obama would increase taxes to 17.9 of GDP in 2013. This is just about what revenues averaged under Reagan. And it would be a step in the right direction. Except the chances of it happening hover around zero.

Obama would get there mostly with a collection of ideas that he failed to sell to even a Democrat Congress. They include: allowing the 2001 and 2003  tax cuts to expire at the end of 2012, capping the value of itemized deductions at 28 percent, taxing the compensation of hedge fund managers and other financiers at ordinary income instead of capital gains rates, and increasing  taxes on multinationals.

These proposals will make lobbyists happy and even richer than they are. But there is no chance that tea-party obsessed congressional Republicans would support any of them. Thus, even with an improving economy, tax revenues are likely to remain a relatively small share of the overall economy through Obama's first term.

The upcoming debate over that small chunk of non-defense domestic spending that is subject to annual congressional review is healthy and important—and it will get very nasty. But compared to burgeoning entitlements on one hand and tax revenues that remain near historic lows on the other, the fight over 12 percent of the budget is a fiscal sideshow.

11Comments

  1. J  ::  5:42 pm on February 14th, 2011:

    The graph that is linked to I believe is causing an error. It will not load and whenever you try to load the page it asks for an email username and password…..

  2. Sid F.  ::  7:16 pm on February 14th, 2011:

    Excellent analysis.

    Ok, now what? Are we looking at

    (1) $1.5 trillion deficits for the foreseeable future, which appears unstainable from both a political and financial point, or

    (2) are we looking at massive cuts in the federal role in society, such as elimination of the Education Department, the Energy Department, the Agriculture Department etc which would have a signficant dislocation on the economy and society, or

    (3) a cut in Medicare/Medicaid/Social Security Benefits which appears politically impossible.

    Now that we know what will not happen (i.e. Budget FY 2012), many of us are at a loss to say what will happen. In any case, it does not forebode well.

  3. Jim M  ::  8:26 pm on February 14th, 2011:

    Change the motivations that drive congressional spending.

    The current tax and budget system rewards high spending members of the legislature that vote for more spending than low spenders. The high spending members “bring home the bacon”, seek positive press by supporting new spending, and approval of their political contributors. This increase in spending is paid for with increased taxes by all citizens, not just the local district that put the representative in office. This lack of linkage between spending by a representative and the district tax rate rewards high spending representative’s districts, and other representative’s districts unfairly suffer the high tax rate with out the high spending benefits.

    A tax system in which the personal and corporate tax rates have a district specific multiplier would adjust the tax rate such that districts of high spender representatives would pay a higher rate than an average district.

    The legislative record of votes on spending bills would provide the required spending information. This would require that all spending bills be passed by recorded vote, not with a voice vote. It would also require that the all of the government spending be subjected to an annual vote, or at least every two years so as to match the election cycle. The sum of each representatives voting would provide their total spending, and the total of all the members numbers would provide an average spend per representative.

    If a member’s vote record matched the average, the tax rate for the district would remain unchanged at 100% of the stated tax rate. If a member voted for 50% more spending than average, the district tax rate would be changed from 100% of the stated rate to 150% of the stated rate. With the US Congress, the district rate would need to reflect the House representative and both senators. Districts that value high government spending would be willing to pay a higher tax rate and send high spending members to Congress. Districts that value lower tax rates over higher government spending could send members that reflect their wishes.

    The district representative adjustments would reset each tax year, and the adjustment for each House and Senate member would be clear and separate line in the tax form. The rate for multiple years of service from the most recent election would be based on the average for the representative for the years from the last election cycle. The tax rates would be computed on the votes for spending from October to the next years September, and announced on the second week of October, so as to be known to the voters prior to the elections.

    This proposal if adopted should change the motivations of our representatives, making them more sensitive to high levels of spending. Yes, it will require amending the Constitution, but it has been successfully amended before.

  4. Michael Bindner  ::  2:59 pm on February 15th, 2011:

    A few things to point out.

    Long term problems for Medicare and Medicaid are outside the budget window. Unless we off-load these problems to beneficiaries and their heirs, higher dedicated taxes are necessary – both in terms of base broadening and rate increases. Taxing all non-wage income (not just that of the wealthy) is a likely first step – but if you do that, you might as well do a VAT or a Business Revenue Tax. Whether or not the BRT stops at the border depends on whether it contains offsets (for the Child Tax Credit) or not.

    For the near term, the tax deal has been made. The President’s position is mostly political and serves as a guide to the Senate. I predict that at some point in the near future, a budget summit will be necessary to finish work on FY2011 and do FY2012.

    For the medium term, as long as the economy is in recovery and unemployment is down, the President has the advantage in the debate, not the House Republicans. If nothing happens, all tax cuts go away. He could not afford to play chicken in December. He can in 2012, when painting the GOP as pawns of the rich for not passing at least some of the middle class tax cuts will be useful to him. Of course, in a recovery, the Clinton era rates were not entirely unreasonable, so letting most of the cuts expire would not hurt that much.

    Going back to the long run and to tax policy, it is in the GOP’s interest to handle the debt, unless they are sure they have a candidate who can beat Obama in 2012 – in which case they may kick agreement on long term deficit reduction down the road. Of course, the financial markets may have other ideas. If they do, expect to see a resurrected Fiscal Commission to write legislation subject to an up or down vote and no fillibuster, with a report back and vote by November.

  5. Evening Fix | Progressive Fix  ::  5:31 pm on February 15th, 2011:

    […] Howard Gleckman is disappointed that the Obama budget didn’t tackle the hard questions of entitlement spending and defense: “The upcoming debate over that small chunk of non-defense domestic spending that is subject to annual congressional review is healthy and important—and it will get very nasty. But compared to burgeoning entitlements on one hand and tax revenues that remain near historic lows on the other, the fight over 12 percent of the budget is a fiscal sideshow.” […]

  6. Wonkbook: Washington reacts to the budget | politicsense.societydirect.com  ::  7:12 pm on February 15th, 2011:

    […] budget doesn’t do nearly enough on long-term deficits, writes Howard Gleckman: “Mostly due to one-off responses to […]

  7. Tweets that mention TaxVox » Blog Archive » Obama’s Sideshow Budget Will Yield Little Real Fiscal Progress — Topsy.com  ::  10:04 pm on February 15th, 2011:

    […] This post was mentioned on Twitter by eZeeTAX, dcbmba. dcbmba said: Another day at the circus. Obama’s Sideshow Budget Will Yield Little Real Fiscal Progress http://t.co/ICyWEF3 […]

  8. Wonkbook: Washington reacts to the budget | worldpol.sizzlingtopics.com  ::  10:12 am on February 16th, 2011:

    […] budget doesn’t do nearly enough on long-term deficits, writes Howard Gleckman: “Mostly due to one-off responses to […]

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