Presidential Budget Analysis

Submitted by kvaughn on Fri, 09/26/2008 - 03:49

The current financial crisis and the proposal to spend $700 billion out of the federal coffers should make us think twice about our government's addiction to deficit spending. This week's post focuses on the financial impacts of the candidates' budget proposals.

Summary

Based on my analysis, it seems inevitable that taxes on the top 5% (families earning more than $200,000 per year - not the $250,000 often claimed by Obama) will revert to rates from the 1990's (36% and 39.6%) regardless of who wins. It is also apparent that neither Obama nor McCain is likely to realize all of their proposals.

If McCain wins, we will likely to continue the same level of deficit spending that we see today, unless McCain is particularly successful in reaching across the aisle to address the issue.

It is clear that Obama will not be able to come close in fulfilling his promises. The biggest question is which promises will he break? Given his commitment to "make some critical investments", it seems unlikely that the deficit will be reduced at all. But it also seems a bit unlikely that he would let the deficit to skyrocket without taking some visible effort to counter it. He is likely to let all of the middle class tax cuts lapse and will likely attempt to impose additional taxes on the top 5% in order to impose his sense of fairness. Thus, the wealthiest would be facing an additional 5% marginal tax due to the repeal of Bush's tax cuts, an additional 4-12.4% marginal tax due to the increase in social security taxes (his plan is still unclear on the exact rate he would implement), and an additional 5% marginal tax to restore tax "fairness" (i.e., steal from the rich). When combined with existing taxes and state and local taxes, this would push the tax rate on the wealthiest to near 70%. This level of taxation is likely to result in significant loss of economic growth and very possibly a decrease in actual tax revenues for the federal government. At a minimum, it is unlikely to increases revenues by much while significantly decreasing economic growth.

With that said, here are the details of my analysis.

Obama's ProposalsLBJ had his Great Society. Obama has his Great Budget Lie.

Sen. Obama and the mainstream media continue to insist that he will not raise your taxes.

In Dover on Friday, Obama rebutted McCain's claims that he would raise taxes on working-class families. "I pledge that under my plan, no one making less than $250,000 a year will see any type of tax increase," he said. "Not income tax, not capital gains taxes, not any kind of tax."

Obama also claims that he is concerned about the budget deficits:

The cost of our debt is one of the fastest growing expenses in the federal budget. This rising debt is a hidden domestic enemy, robbing our cities and states of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on. . . . If Washington were serious about honest tax relief in this country, we'd see an effort to reduce our national debt by returning to responsible fiscal policies.

And yet, Obama's solution to almost every ill is a new or expanded government program - supposedly to be paid for by the wealthy and those making "excessive" profits.

I'm not bashful about it: wealthy will pay more taxes

Obama and Biden will enact a windfall profits tax on excessive oil company profits

Taxes

But do Obama's proposals really add up? The answer can only be considered a resounding NO! Even if you trust the analysis by the liberal Tax Policy Center (which contains several assumptions that are highly favorable to Obama), Obama's proposals to change the existing tax code will have the result of reducing net government revenue by roughly $300 billion per year. (The left likes to call this a "tax cut"; in reality, most of the reductions are tax credits - many of which result in tax rebate checks to people who have no income tax liability.)

Compared to current law, TPC estimates the Obama plan would cut taxes by $2.9 trillion over the 2009-2018 period.

The net result of which will be to increase the annual deficit from $210 billion to $500 billion - without considering any of Obama's spending proposals.

Spending

Determining the cost of these proposals is a tricky problem since many of them are too vague to have any meaning. For example, he claims that he supports "Rebuilding the military for 21st century tasks". One would have to think that this would entail a significant long-term or permanent increase to the military budget - but the proposal is vague enough that it is impossible to establish any meaningful estimate. As a result, some pro-Obama sites have waved off the issue as unimportant saying that they don't know how much his proposals will cost.

Do Obama's Tax and Spending Proposals Add Up?The short answer is maybe, but we don't know, because the Tax Policy Center hasn't published a full analysis yet.

NOTE: The current mortgage crisis is a prime example of what can happen when economists decide that economic facts are unimportant!

Nonetheless, various groups have attempted to estimate costs for those aspects of Obama's proposals that have been sufficiently detailed and the results are eye-opening. (It's easier for blood to shoot out when your eyes are open!) Most of the analyses performed to date have shown known expenses in the range of $300 billion to $344 billion. However, these estimates leave many programs with an unknown cost and are based on expected expenditures over the next presidential term. This results in the estimates understating the true cost since they account for the fact that many of these programs will take time to enact and get up to full speed. Too many of our large entitlement programs were enacted using this type of accounting and as a result, Medicare and Social Security are now both in trouble. But even if you use these numbers, the annual deficit rises to more than $800 billion!

In order to provide a more accurate view of Obama's vision for America, I have developed my own analysis that looks at the total annual cost of each proposal when fully phased in. One-time expenditures (e.g., economic stimulus) are also included in this estimate since these expenditures generally reflect the candidate's attitude towards spending your money and the fact that there always seems to be some crisis around to spend money on. (However, I have left out the current Wall Street Bailout since this does seem to be truly exceptional).

My analysis indicates that Obama's spending proposals (excluding any of the "tax cuts" claimed by the Tax Policy Center) add up to $430 billion to $775 billion per year - and this still does not include over 100 proposals he has made, including "Rebuilding the Military". Thus, the Obama proposals are likely to cause long-term budget deficits of more than $1 trillion. To put this number in perspective the government receives less than $3 trillion in revenues from an economy that is "only" $13.8 trillion.

Very simply put, this type of deficit spending is unsustainable. By the time the we bail out the wall street mess, we will have an active debt of over $10 trillion dollars. Previous studies have shown that the current net worth of the federal government is a negative $54.3 trillion, almost 4 times our annual GDP, once our Social Security and Medicare liabilities are considered.

Granted, Obama is now realizing that some of these proposals may not be possible in the current budget crisis - but he hasn't given up hope in saddling future generations with his proposals (he apparently doesn't recognize the broader budget crisis):

Democratic nominee Barack Obama, who has proposed an array of expensive initiatives on healthcare, alternative energy, and infrastructure, acknowledged yesterday that the proposed $700 billion bailout of Wall Street would probably postpone some of his proposals. "I think we're going to have to phase it in," he said on NBC's "Today" show.

But don't worry, Obama promises to pay for all of these proposals.

Now, many of these plans will cost money, which is why I've laid out how I'll pay for every dime - by closing corporate loopholes and tax havens that don't help America grow. But I will also go through the federal budget, line by line, eliminating programs that no longer work and making the ones we do need work better and cost less - because we cannot meet twenty-first century challenges with a twentieth century bureaucracy.

Clearly, his proposals fall well short of paying "for every dime." In fact, to make up the shortfall without deep cuts to entitlement programs (Social Security, Medicare, etc.), he would have to eliminate virtually all discretionary spending - including the Department of Defense, the Global War on Terror, the Department of Education, etc. etc. etc. But then again - maybe that's what he means by "Rebuilding the Military."

McCain's Proposal

Of course, this is all meaningless if McCain's proposals are just as bad - and the mainstream media would like you to believe that they are. The left leaning Tax Policy Center estimates that McCain's tax cuts (on people who actually pay taxes) results in a loss of revenue of roughly $420 billion per year. The mainstream media has issued numerous articles pointing out how this is worse than Obama's tax proposal - but it only considers the tax side of the equation.

So how do McCain's spending proposals stack up?

Most of McCain's proposals tend to be measured in the millions and not the billions. The National Taxpayer's Union estimates McCain's spending proposals to total $68.5 billion per year. Not surprisingly, the left stays away from estimating spending for the candidate's programs. My own analysis revealed few additional expenses and only came up to a annual expense of $71.9.

Similar to Obama, McCain suggests that he will also find savings in the current federal budget - the main difference is that McCain has actually proposed a target dollar value of savings. Of course, the left loves to describe how difficult it is to cut expenses when a Republican tries to do it, but one has to assume that it would be even harder to cut an additional $300 billion.

Laura Meckler reported that McCain "says he would cut $160 billion a year from a federal discretionary budget that totals a little more than $1 trillion" and noted that "[t]he $160 billion figure is equal to the total budget in 2007 for the departments of Education, Energy, Homeland Security, Justice and State." The article went on to report: "The chances of cuts of this magnitude are 'nonexistent,' said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that promotes fiscal discipline. 'There's not a consensus to cut back on the functions of government that much,' he said. 'Those are very, very deep cuts.'"

Well certainly Democrats don't want to cut government, but many in the US would love to see those sorts of budget cuts. Nonetheless, I agree that $160 billion may be optimistic; but if he tries for $160, perhaps we'll realize $100 billion.

Thus, McCain's tax and spending proposals are likely to add $500 billion a year to the national deficit offset by perhaps $100 billion in cuts. The result is a net annual deficit of $610 billion versus Obama's $1 trillion. A difference of nearly $400 billion.

Commitment to Balancing the Budget

Regardless of the candidate's pie-in-the-sky proposal, one must also consider their comment more broadly about the budget. McCain actually talks about balancing the budget. Obama refuses to make such a commitment.

McCain's proposal to balance the budget by 2013 rests on three principles: reasonable economic growth, comprehensive spending controls and bipartisanship in budget efforts.

Asked about McCain's proposal Monday, Sen. Barack Obama said he agreed with those who thought it was "overly ambitious" and said he would not make the same pledge. "I do not make a promise that we can reduce it by 2013, because I think it is important for us to make some critical investments right now in America's families,'' he said.

McCain has also stated how he plans to achieve this:

His plan includes a one-year freeze in domestic spending, entitlement reforms and reducing the growth in Medicare spending.

McCain says he'll cut spending by vetoing any bill with earmarks. He also says he'd make a bipartisan effort to reform Social Security.

"I know how to work across the aisle. I've done it with Democrats, and I've done it for many, many years. We'll sit down across the table with the backing of the American people," he said.

Of course, these too are just promises. But, while politicians do not always keep their promises, they generally have to at least demonstrate some effort to maintain them. Given McCain's commitments on the campaign trail and his history in the Senate, one can assume that there will at least be some effort to constrain spending during a McCain administration.

On the flip-side, Obama is essentially promising budget deficits as far as the eye can see.

A Touch of Reality

Of course, in the US, the President has relatively little power over the budget. The President makes budget proposals, but Congress holds the purse strings. So we should also consider the likelihood of these proposals getting passed.

Democrats currently hold a 51-49 seat majority in the Senate and a 235-199 seat majority in the House. Most polls indicate that the Democrats will gain perhaps nine seats in the House and perhaps 5 in the Senate. Thus, the next President is likely to see the Democrats with roughly a 56% majority in both the House and the Senate.

This suggests that Obama's proposals will be well-received, while McCain's will be dead-on-arrival. While Obama may not be able to get all of his proposals passed (there are a few Democrats that can do math), it is likely that he would get many of his tax proposals approved and probably at least half of his spending proposals. This would result in an annual deficit of perhaps $750 billion along with failing to fulfill his promises.

On the other hand, it is very unlikely that McCain will get his tax proposal through. In fact, it is more likely that Congress will pass a proposal similar to Obama's and dare McCain to veto it. And remember the default scenario is that the Bush tax cuts will expire. Thus, it seems inevitable that the Bush tax cuts on the top 5% will expire; the only question is will all of the tax cuts expire or will they be retained and coupled with generous government handouts as Obama has proposed (e.g., the Making Work Pay credit). Similar to the deadlock between the President and the Congress in the late 1990's, this is likely to benefit US coffers. The likely compromise position will be to extend the middle class tax cuts but to not provide the various tax credits that Obama has proposed. This will result in a deficit figure in the range of $400-$450 billion. Given that the biggest McCain spending proposal is the cap-and-trade system for pollution, we can also assume that most of his spending will be passed, but very possibly only with corresponding budget cuts to pay for it. Thus, the net deficit figures for a McCain administration is likely to be in the range of $450 billion. While this is far from where we should be, it is a number that our nation has become used to.