James Pethokoukis

Politics and policy from inside Washington

Obama’s $2 trillion stealth tax hike

April 18, 2011

Talk about fuzzy math. President Obama claims higher taxes will account for a mere third — $1 trillion — of his proposed $3 trillion debt reduction over 12 years, not counting less interest expense. Wrong. The actual number is probably around 50 percent of $4 trillion in savings — some $2 trillion — and could be closer to 60 percent. (More details below.) Instead of offering a template for a Grand Compromise, Obama seems to have created a Grand Obfuscation.

This is just one example among many that shows how Obama’s much-hyped new budget plan is actually neither new nor a budget nor a plan. To the extent that it’s even a “framework” — to grant the White House its preferred descriptor — it’s one whose ideas and goals are precariously fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity. Then again, the core purpose isn’t budgetary balance but political persuasion.

The Obama White House naturally wants the media to favorably compare his outline to House Budget Chairman Paul Ryan’s 73-page  “Path to Prosperity” which is highly detailed and has been scored accurate by the Congressional Budget Office. It brings the budget into balance and eliminates the national debt by cutting spending — not raising taxes.

And how does Obama’s  “Framework for Shared Prosperity and Shared Fiscal Responsibility compare?

1) Obama’s Framework is a speech, along with a roughly 15-page fact sheet that is unlikely ever to get placed under the CBO microscope. It’s tough to score generalities such as the president’s claim the plan would put “deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.” “Close to”? “Toward the end”?

2) The Obama Framework also fails to give a clear trajectory of where the debt-to-GDP ratio is heading, other than to call for a trigger that would boost taxes or cut spending in 2014 if the ratio doesn’t appear to be bending lower.

3) Other oddities abound. The plan has a 12-year time frame rather than the customary ten. It doesn’t indicate  what baseline it uses to make claims that it cuts debt by $4 trillion, if you include interest expense. Nor does it spell out what economic projections are being plugged in. Obama’s 2012 budget released in February was more bullish than the CBO’s, which Ryan uses.

4) Also unlike the Ryan Path, the Obama Framework doesn’t show how his plan affects debt and deficits over the coming decades. If it did, Obama would have to reveal that he can’t a) keep government spending above historical levels and b) balance the budget and reduce debt long term without c) jacking middle class taxes through the roof.

The Obama Framework is so vague and fuzzy that doing a true apples-to-apples comparison between the Ryan Path and the Obama Framework comparison is almost impossible. (Best guess: Ryan cuts $3 trillion more than Obama over a dozen years.) This could be intentional.

The tax issue mentioned earlier provides a perfect illustration. Toward the end of his speech last week, Obama said the following:

This is my approach to reduce the deficit by $4 trillion over the next twelve years. It’s an approach that achieves about $2 trillion in spending cuts across the budget. It will lower our interest payments on the debt by $1 trillion. It calls for tax reform to cut about $1 trillion in spending from the tax code. And it achieves these goals while protecting the middle class, our commitment to seniors, and our investments in the future.

But earlier in the speech, Obama also said this:

In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.

If you’re keeping score, what Obama is actually proposing is $1 trillion in new taxes on wealthier Americans (and small businesses) and $1 trillion in higher tax revenues by reducing tax breaks and subsidies for a total of $2 trillion in new taxes over 12 years. That means total debt reduction, not counting interest, would be $4 trillion, 50 percent of which would come from higher taxes. The econ team at Goldman Sachs ran a similar analysis and found that 56 percent of Obama savings over ten years could come from higher tax revenue.

In this way, Obama relies far more on taxes than the two-parts spending/one-part taxes formula of the Obama-Bowles-Simpson debt panel that is supposedly his model. As Obama said, “It’s an approach that borrows from the recommendations of the bipartisan Fiscal Commission I appointed last year.” Not really.

Now none of this is easy to discern from Obama’s speech nor from the accompanying fact sheet. Neither indicates which budget baseline Obama is using. If he is, for instance, using the standard CBO baseline which assumes all the Bush tax cuts expire, Obama’s budget plan might actually get close to 60 percent of its debt reduction from taxes, especially if he also used the CBO’s gloomier GDP forecast. And if his mid-decade tax “trigger” should get pulled …

Of course, the framework that really interests the White House is a political one. They want to set the terms of the 2012 presidential election debate. And with this budget plan they have, though surely not in the way they intended. America’s debt problem is one of too much spending, not too little revenue. By offering a tax-heavy fiscal fix that keeps Big Government firmly in place, Obama offers Americans a clear choice of economic futures, his or Paul Ryan’s.

Comments

So your problem with the President’s speech is now that you’ve actually read it attentively that it will be twice as effective at reducing the debt than it looked to you at first glance?

And you blame him for your failure to grasp the obvious the first time you heard/read it?

Posted by TomBetz | Report as abusive
 

Dear James,

If you didn’t grasp this from the speech, then you have not been paying attention. Also, it’s extremely disingenuous the way you guys in the press use the word “hike” as opposed to “increase”. Not every tax increase qualifies as a hike (see the meaning of the word). Anyway, the so-called hidden tax increases are gotten precisely by removing the ridiculous deductions that large corporations are able to pull off.

I also love the little “(and small businesses)” garbage that you’re trying to pull. Small businesses don’t really get hit by this sort of tax increase, and those that do aren’t really small businesses anymore.

Lastly, the Ryan plan ends the social safety net, not just “as we know it” like the press has been saying, it ends the social safety net, _period_. It cuts taxes on the wealthy, and the CBO has shown that it actually increases the deficit until the savage medicare cuts come online. Lastly, you’re basing your opinion of Ryan’s plan on the numbers from the AEI, which has, time and time again, been shown to be absolutely disreputable, while at the same time casting doubt on Obama’s numbers.

If one wants to see “stealth partisanship”, one need not look further than this blog. You should be fired for being a partisan shill.

Cheers,

Negi

Posted by Negi | Report as abusive
 

James:

Excellent job exposing the fact that Obama, like all liberals, only knows how to tax and to spend, not how to cut.

TomBetz claims tax hikes are the only solution, but that is never effective. Liberals will spend $1.20 of every tax dollar.

Negi whines that we will lack a social safety net if government takes “only” 20% of the GDP. I say to Negi if government cannot fulfill its proper role for “only” 20% of GDP, then that government is incompetent.

Posted by RobertArvanitis | Report as abusive
 

James–
Cutting the deficit means cutting demand in the economy which means even fewer jobs. There is no storeowner or factory manager anywhere in the country who is going to hire people because the government reduced its deficit.

Posted by Yellow105 | Report as abusive
 

Alas, James. So many errors and so little time!

Yellow105 misunderstands completely. Store owners and factory managers cannot WAIT to hire, once they are freed of the fear of ever-higher taxes, swelling deficits and out-of-control spending.

The deficit is not just a number. The deficit is the emblem, the result of bad policies: too much spending, too much taxing, and far too much entitlement mentality.

Posted by RobertArvanitis | Report as abusive
 

James,

Let’s see, Obama and Democrats tried the “Republicans are for Tax cuts for the wealthy” idea in fall 2010. They got crushed. They will get crushed again, so, yes, let’s have that debate.

Obama’s speech makes clear that 1. he has no intention of cutting any real spending. 2. He only wants higher taxes for punishment.

Fair share? When 45% of the population is paying NOTHING in income taxes, THAT is unfair. Especially since they complain the loudest. Can you imagine that, pay nothing, yet complain the loudest.

Just like for health care, I’d agree to single payer if the formula was take the total health cost, divide by the total population, and that’s the premium or tax per person. I’d might agree to a tax increase, but only if everyone had skin in the game.

So far, Obama’s idea of shared sacrifice is for only 2% to sacrifice. He won’t cut any services for anyone else, and he only wants 2% to pay.

Obama and Dems are spendaholics who think the tax payers are willing to be the suckers for whatever they want.

Posted by cregster | Report as abusive
 

The libs think that using the class warfare ploy as Bama did in his speech(note there was no economic plan spec-ed out ala Ryan’s) because it has always scared people. But, entitlements, dependent peoples who do not pay taxes(47%) and the welfare types seem addicted to Dem politics. Now, however, many people: Reagan Dems, Indies, Libertarians, and GOP bravehearts finally, are saying: enough. We are broke. We need fewer taxes to drive investments and jobs, and more spending cuts, fraud reduction and policies that actually work unlike Bama’s. None of his, from health, welfare, borders, military, and especially a lack of a real energy domestic program, have worked. Stimulus, bailouts all have failed. And his Cabinet czars with their socialist tax and spend blurs, make America look like Greece and Spain cloned. Enough of that too. This naif is alien to our history, heritage, culture and values. Americans cannot take much more of this out and out socialist before we slide into a 3rd world status where no one will have liberties to excel in a free enterprise system.

Posted by phillyfanatic | Report as abusive
 

“America’s debt problem is one of too much spending, not too little revenue.”

Is that a scientific fact, James? Sounds like blind ideology to me. If something else, please explain.

You and the other anti-tax zealots on here need to look at this graph and then ask yourself whether our “problem” is high taxes …

http://www.tnr.com/blog/jonathan-cohn/86 974/happy-tax-day-raise-scandinavia-dout hat-liberal?utm_source=The+New+Republic& utm_campaign=6dec145e64-TNR_Pol_041811&u tm_medium=email

Posted by bleedingheart67 | Report as abusive
 

It’s hard to call anything Obama produces “a plan”. He is intentionally vague.

Posted by JohnDavis | Report as abusive
 

yellow105: keynes meant for government spending to increase during a period of decreased aggregate demand. This means during a recession. In a healthy economy, demand is strong enough that deficit spending can actually have a negative effect on the economy by absorbing money that would have been spent elsewhere, like hiring an extra employee to your hypothetical store or buying new machinery for your factory. Running deficits year after year, which is what this country has done for the past ten years, creates a large debt. In the case of certain european economies, this debt becomes so large (in excess of 90% of GDP) that it slows growth and can cause the need for default or bailout. Since there is no economy large enough to bailout the US, we need to bring down the deficit now and start running surpluses. Just because Obama said in a speech that cutting spending now would hurt the recovery doesn’t make it factual.

Posted by skeletalbassman | Report as abusive
 

bleedingheart67: its correct that compared to certain european economies, ours has comparatively low taxes does not mean that we need to raise our own taxes to meet theres. The recent european sovereign debt crisis should illustrate that just because you have high taxes doesn’t mean you solve your debt problems.

It is the level of government spending, not the level of tax revenue, that is currently deviating from its traditional levels in this country. Government spending under obamas plans rises from an already elevated rate to 25% of GDP (for the last 50 years govt spending has hung around 20%). I’m sure you’ve seen the math that raising taxes on only the top 2% wouldn’t cover the budget shortfalls. This means middle class tax increases.

Posted by skeletalbassman | Report as abusive
 

skeletalbassman, you have it exactly backwards. It is the level of tax revenue, not the level of govt spending, that is currently deviating from its traditional levels in this country. Govt spending in 2010 was 23.8% of GDP. In 1983, govt spending was 23.5% of GDP. Tax revenue was 14.5% of GDP in 2010. You have to go back 60 years to find a comparable level of revenue.

Posted by JamesGreenfield | Report as abusive
 

And James, you don’t mention this directly but 1983 was a very comparable year to now, on the heels of a deep recession, so it’s a good comparison.

And Skeletal, I don’t advocate raising our top marginal rates to Scandinavian levels of 50% plus, although I’m sure you know we had rates that high as recently as Ronald Reagan. But having lived through the “economic disaster” that Bill Clinton’s 1993 tax hikes were supposed to cause, according to conservatives at that time, I would have no problem with restoring the middle-class rates of those years, bid up the top rate a couple percent beyond Clinton, cut growth of spending a lot less dramatically than Ryan has in mind, and see where that gets us.

Posted by bleedingheart67 | Report as abusive
 

The Congress will only act when the electoral cost of doing nothing outweighs the electoral cost of doing something deeply unpopular-inflicting universal economic pain. And we are at that point.

Posted by Jay701 | Report as abusive
 

Obama is simply trying to pull a razzle-dazzle on the American people once gain in hopes of fooling them into reelecting him.

Anyone who has been paying attention knows that you can’t believe a word the man says anymore, nor anyone in his administration for that matter. They want to grow government power and control over the people, not reduce it. What’s worse is that they believe the end justifies the means, and they feel no compulsion to be honest at all.

Posted by SamAdams25 | Report as abusive
 

If Bozobama was really concerned about the tax rates on the rich then he would have just filled out his taxes using the standard deduction. Instead he itemized his deductions and saved himself $650,000. Here the man is getting a totally free ride at tax payer expense and he couldn’t even forgo his deductions and make a donation to the treasury out his $5.6 million dollar income. And you leachocrats believe every lie that crosses his lips.

Posted by soundoff | Report as abusive
 

This article helps flesh out the obvious: that Obama is a professional class and race warfare con artist (as in: a community organizer).

Many of us tried to warn America about Obama during the 2008 election, but between the bush fatigue and the MSM playing the race card against anyone pointing out Obama’s well documented neo-Marxist roots – we were gifted the most incompetent president in history.

Posted by Parker1227 | Report as abusive
 

Obama’s automatic “tax trigger” plan is his way of saying he and the leftist democrats will demagogue and defeat any significant spending cuts and then claim that the automatic trigger forced them to implement huge tax increases.

And contrary to what all of the “eat the rich” leftists would like us to believe, there is not nearly enough “evil rich” income to pay for all of our future debt.

That leaves one option, short of living with a leaner government: Tax the Middle Class – big time.

Posted by Parker1227 | Report as abusive
 

To Bleadingheart67, who provided the chart that showed that many European countries tax their citizens more, and spend more. What he didn’t tell anyone is who pays those taxes. I wonder if he has ever looked at the OEDC study of tax progressively of the member countries, that includes most in his list.

They state unequivability that the United States has the most progressive tax system in the developed world. Why might someone ask – well, we don’t have a VAT that taxes everyone, our social security taxes are lower, and we pass more benefits percentage wise to lower income groups. This in fact confirms what James says – that the Obama way is that 2% of our people will pay for the other 98%. The OEDC study proves that is not the way the world works.

Returning to bleadingheart67′s chart he refers to, Norway is the top country in terms of government spending. In the OEDC study of progressively, Norway ranks 19th of 24 countries in terms of progressively, and the US ranks 1st. Moreover, Norway has a ratio of share of taxes paid for the top 10% to the income of the top 10% of 0.95 – that is, their top 10% pay less than their share of income. In the US according to this study, the ration is 1.35, that is, the top 10% pay much more of the taxes than as compared to their income.

So the next time a bleeding heart liberal, such as bleadinghear67 puts up data to influence anyone, remember that the countries they and Obama would have us emulate, tax their middle class far, far more than us, and far more proportionately too!

Posted by thereyougoagain | Report as abusive
 

Today S&P downgraded the outlook for the credit rating of the United States of American telling us their was at least a 1 in 3 chance that we would lose our AAA rating because of Obama’s massive corrupt spending and debt as well as his failure to do anything about it. While the Republicans have shown serious leadership with a plan toward getting Obama’s massive debt under control, Obama just ridicules them and talks about taxing rich people. Yet GE, who signed onto Obama’s election and reelection campaign doesn’t pay a penny in taxes on $14 billion in profits. So the really rich that suck up to Obama won’t pay, which just leaves working Americans who earn a paycheck. Massive spending and debt, unauthorized war, and the Middle East in Chaos with gas prices going throught the roof. Obama is destroying our economy and refuses to do anything except run for reelection!

Posted by valwayne | Report as abusive
 

James: 1983 seems to be a peak year in government spending in the US as it was 20% o below preceding early Reagan and declines steadily to under 20% again by 1999 where it pretty much stays at 20% under Bush. though 1983 might provide a comparable number of govt spending/GDP, that recession occurred when public debt was closer to 30% of GDP rather than the 60% that we face now. Reagan did not need to take into account the unsustainable nature of the welfare state during his deficit spending and he regardless brought spending down after that year. Obama plans a sustained level of ~25% in his budget.

Bleedingheart: I’m not saying that we cannot raise taxes nor that our economy will tank if obama does raise taxes. What I am saying is that I prefer solving the deficit through actually dealing the cost of the welfare state over the next fifty years rather than simply raising taxes (though raising taxes is obviously a necessary part of the solution). I disagree more with Ryan’s method of cost control rather than his numbers.

Posted by skeletalbassman | Report as abusive
 

Thereyougoagain — You’re a little self-contradicting. In the second paragraph of your post, you say that “the Obama way” is that 2% of the people pay for the other 98%. In the last paragraph, you say that people like me and Obama want us to emulate countries that tax the middle class far more. (Although as I said I’d be perfectly happy emulating America’s tax structure under Clinton.)

And while I do find the OECD study on progressivity quite relevant to this discussion, I wonder how countries that tax less progressively than us stack up in terms of income distribution from the top to bottom of the scale. When the top earners make 100 or 200 times the average working stiff, of course their tax bill on average is proportionately quite a bit higher. Wonder how Norway ranks compared to us in that regard?

Posted by bleedingheart67 | Report as abusive
 

Reagan and Bush2 put most of the increase in wealth for the top 1/2% of the country into the deficit. Note the explosion of the deficit under their “conservative” leadership. In addition Bush2 put all of the wars of choice on credit. Obama has not been brilliant but he has avoided the Greater Depression that was being passed to him.

The hyper-rich are paying less in taxes than they have in over 30 years. And they have tripled their wealth in the last 10 years, while everyone else has lost income.

Any responsible approach to the deficit problem requires both budget restrain and increase in revenue. Return to the Clinton era tax structure when the country had a yearly surplus.

Posted by TominVermont | Report as abusive
 

Take the top 2% income earners and take all their money..not just tax money but all their money…
This totals nearly 980 billion dollars… for 1 year..
This is not enough to balance the budget….even if you take all their money for 15 years…This tells me that the GOV is way out of control…getting rid of the tax loop holes for the rich is just fair…but the Gov. needs to cut all the fat and some of the lean, to get back on track. WE already pay too much in taxes…Income tax, state tax, sales tax, property tax, gas tax, alcohol tax, tobacco tax, auto tax, school tax, un-employment tax, etc,etc the list goes on and on….there is no excuse for the over spending that is happening except to grow government power over the people….The government of the people, by the people, and for the people has changed to the government of the government, by the government, and for the government….WTF

Posted by Justwrong | Report as abusive
 

5:40 pm EDT

‘“America’s debt problem is one of too much spending, not too little revenue.”

Is that a scientific fact, James? Sounds like blind ideology to me. If something else, please explain.’

Hi. Are you capable of reading charts, or would you like for us to send someone over to your house to help you out?

http://tinyurl.com/69zjrc9

Posted by fargoblahblah | Report as abusive
 

“Return to the Clinton era tax structure when the country had a yearly surplus.”

Why do people keep insisting that there was a budget surplus during Clinton’s Presidency? It was close, but the last time the total debt of the federal government was lower than the previous year was 1957. Here is the debt and deficit from year-to-year: http://home.adelphi.edu/sbloch/deficits. html And remember that he was working with a Republican Congress to achieve those declining deficits. Split rule is usually better for spending, which is the biggest factor in the deficit.

“The hyper-rich are paying less in taxes than they have in over 30 years. And they have tripled their wealth in the last 10 years, while everyone else has lost income.”

As a group, yes, but that group changes all the time. It’s not like everyone who was “hyper-rich” 20 years ago (or even last year) is still rich. There is always quite a bit of movement (especially upwards) so your statement is misleading.

http://www.nationalreview.com/articles/p rint/264296

From the article: “Among those with the very highest incomes in 1996 — the top 1/100 of one percent — only 25 percent remained in the group in 2005. Moreover, the median real income of these taxpayers declined over the study period.” And “Of those who were in the poorest fifth in 1979, 85.8 percent had moved to a higher bracket by 1988, and 14.7 percent of them moved to the top bracket.”

Posted by braceletwinner | Report as abusive
 

Hi fargoblah blah,

I can read them just fine, thanks, and I’m generally familiar with these figures and percentages. But they don’t explain why the solution is shrinking the circle on the right (expense) without dare touching the one on the left (revenue). The writer of the accompanying article kind of begs the question, I think unintentionally, when he notes something to the effect of, “Revenue is barely growing at all.”

Posted by bleedingheart67 | Report as abusive
 

Democrats are so darn lazy. If they would just look up some FACTS instead of repeating lies otherwise known as Democrat talking points, they might realize that the top 10% of tax payers already paid 71% of the income tax though they only made 43% of the income… nah they’re not paying their “fair share” as Obama likes to blather…

The top 10% only make $3.3 trillion in AGI so for every 1% increase in their taxes you only get $33 billion… so raising rates back to the Clinton rates only nets about $100 billion a year. Of course that ignores the fact that many if not all of the top 10% would adjust their affairs to avoid most or all of the rate increase but just for argument, let’s use the $33 Billion figure.

Now a question for you Democrat/Socialists of “tax the rich” school. What is the annual interest on Obama’s $16 trillion deficit? OK I’ll tell you since I am sure you have no clue,it’s $400 Billion. Obama’s annual deficit is $1.2 Trillion.

So let’s do a little math, going back to the Clinton rates covers only 25% of Obama’s interest expense… so for “tax the rich to work, we really need an additional $1.2 trillion a year to cover the Democrat spending and the debt service. So he really has to raise rates by about 36% on those evil rich people in the top 10%.

You see the magic of Obama and the Socialist/Communists “Tax the Rich” plans is that they don’t work. Honesty is not one of Obama’s strong suits. You can now see how ridiculous any argument that relies on “taxing the rich” is. Spending has to be cut by well over a trillion dollars a year.

Posted by labillyboy | Report as abusive
 

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