James Pethokoukis

Politics and policy from inside Washington

Obama’s new plan may actually rely 60 percent on tax increases

Apr 15, 2011 15:38 UTC

In his budget speech earlier this week, President Obama described his budget plan this way:

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 tax expenditures — spending in the tax code. And it achieves these goals while protecting the middle class, protecting our commitment to seniors and protecting our investments in the future.

Now with all these plans floating around — the debt commission, Paul Ryan’s — Goldman Sachs has tried to do an apples-to-apples comparison over 10 years (not 12 as White House tried to pull off). And here is what it found:

gsSo of the 3.4 percentage points of savings, more than half — 1.9 points — comes from taxes. That’s 56 percent, not the one-third or one-quarter that Obama was talking about. And I am assuming that Goldman is using the White House’s rosier economic forecasts when evaluating Obama’s plan. (Ryan uses the gloomier ones from the Congressional Budget Office.) I think the Republicans will be pointing this out.

UPDATE: Here is one more key bit from the Goldman Report:

Measured against the CBO alternative scenario, the President’s proposal relies more heavily on increased revenue than the other proposals. It assumes that the $1 trillion in proposed revenue increase (over 12 years) does not include the additional $700bn (over ten years) from allowing the upper-income tax provisions to expire; the President’s spending cut proposal is on the same general scale as the external commissions, though somewhat smaller, at around 1.5% of ten-year GDP.

To be clear, Obama is abolishing the Bush tax cuts for $250,000 and  an additional $1 trillion tax hike.

COMMENT

@mailo24, anyone who doesn’t think as you do is crazy…. right? And “down with social programs!” (until it is you who are sick, injured, unable to work, laid off, fired, retired etc etc etc)

Posted by hsvkitty | Report as abusive

Obama’s upside-down tax reform

Apr 14, 2011 19:34 UTC

Larry Kudlow notices on part of the Obama budget/speech that doesn’t seem to echo Bowles-Simpson:

We thought tax reform meant lowering rates and broadening the base by eliminating or cutting back on various deductions, credits, and loopholes. That’s what the Bowles-Simpson commission proposed. That’s what Paul Ryan and David Camp are working on. And that’s the pro-growth model.

But President Obama unveiled a much different tax-reform vision in his much-anticipated debt speech on Wednesday. He would raise tax rates on upper-income earners and small businesses. He also would eliminate deductions and credits, or so called “tax expenditures.” The president referred to these tax-expenditure reductions as “spending cuts.” In his context, they most certainly are not. They are more tax hikes.

Basically, the president is giving successful earners and small-business filers a double tax hike. That’s what it really is.

Of course, the president’s formula of estimating higher revenues to lower the deficit is completely wrong. The reality is that higher tax rates will slow the economy, inhibit new start-up companies, penalize investors, and may very well lose revenues and increase the deficit. In the latter part of his speech the president did mention some kind of middle-class and corporate tax reform. But he gave no specifics.

COMMENT

Everybody should pay an equal percentage of taxes. If you only bring in a cute little 15k a year then maybe you should take your pell grants and go to school so you can do something useful with your life. Whoever thought penalizing the successful was a good idea was clearly not very successful.

Posted by JKHazen | Report as abusive

The big hole in Obama’s budget plan

Apr 14, 2011 08:01 UTC

Did the White House A/V dude load the wrong file into Obama’s teleprompter? While the president’s class-warfare attack on Paul Ryan’s “Path to Prosperity” would probably have earned rousing applause at a Jefferson-Jackson dinner, the speech failed to accomplish its advertised purpose: outlining Obama’s long-term blueprint to avoid a debt crisis.

Even if a) his doubling-down on Obamacare’s unproven cost controls works and b) his trillion-dollar tax increases don’t slow the economy, this new plan only stabilizes government debt as a share of the economy for maybe a dozen years. After that, the march to financial crisis continues apace.

Of course, if Obama had actually offered a multi-decade blueprint, like Ryan did, he would have had to concede that there’s no way he can pay for all his spending over the long term without Washington raising taxes on the middle-class and probably instituting a value-added tax. (On that count, one nonpartisan budget expert told me, the Obama plan is “ridiculous.”) As I wrote a few days ago:

The president is also promising a long-term fix. The further out one goes, however, the less feasible it is to spare the middle class as Obama promises. White House economists reckon America’s aging population – and its healthcare needs — means government will need to be bigger than its post-World War Two average of around 21 percent of GDP. (And this actually assumes Obamacare’s cost controls work.)

Yet the U.S. tax system has rarely generated anywhere near so much revenue as a share of output, much less two to four points higher or more. And it sure can’t by just taxing the “rich.” In that scenario, a value-added tax hitting everyone could well be needed. A 10-point VAT, layered onto the current system, would generate $3 trillion in revenue over ten years. (Again, assuming no negative economic impact.)

Now that’s no way to launch a reelection campaign. It’s also no way to win the economic future. Yesterday, the International Monetary Fund kvetched that the White House had no credible plan in place to cut U.S. debt. Some 24 hours later, it still doesn’t.

The Obama debt plan, lightly dissected

Apr 14, 2011 00:50 UTC

Here is a pretty good rundown of President Obama’s plan  from Goldman Sachs (with my comments in bold):

1.The president proposes to reduce the deficit by a cumulative $4 trillion over twelve years (through 2023), though it is not entirely clear what baseline this savings number is relative to.

Yes, this confused me, too. It is easier to look at the year deficit- and debt- to-GDP numbers. But it also tough to do this since the White House hasn’t put out a breakdown. Instead it produced this: “The Administration projects that this framework will reduce deficits as a share of our economy to about 2.5% of GDP in 2015, and put deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.” What does “close to” mean? I dunno. And what about the strange use of a 12-year budget window to make his cuts look bigger. Very weird. Will this ever by submitted to the CBO?

2. The president also proposes to establish a debt trigger that would enforce across the board cuts in spending and “tax expenditures” if by 2014 “the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.” For example, the current CBO baseline assumes an increase in the debt to GDP ratio from 2018 to 2020 of 75.3 to 76.2, so if this policy were to apply today (rather than 2014 as proposed), it would imply additional fiscal tightening as we understand the proposal.

The WH numbers appear to be close to Paul Ryan’s numbers which would mean a debt ratio stabilized around 70 percent, much  better than the 87 percent of his previous budget.

3. More discretionary cuts reflect recent congressional debate. President Obama’s new proposal would reduce non-defense discretionary spending by an additional $200 billion over ten years compared with the freeze proposed in his FY2012 budget, released in February. To some extent this probably reflects the fact that any freeze over future years would start at a lower level, and thus presumably generates additional cumulative savings.

The budget deal would supposedly cut $315 billion over ten years, so Obama is expecting to cut less than that.

4. The president indicates that additional savings would also be found in defense discretionary spending; the White House fact sheet identifies $400bn in savings over twelve years (through 2023) beyond the savings from ramping down overseas military operations. Some of this reduction appears to be new, but it isn’t clear how much it overlaps with existing proposals to reduce defense spending.

Me, neither.

Taxes: Few specifics. The president endorses the concepts behind the fiscal commission’s proposal, namely to reform the tax code and reduce tax expenditures. Note that the fiscal commission recommendations included multiple reform scenarios. He also indicates that increased revenue should make up only one quarter of total budgetary savings (including interest savings), in line with the fiscal commission’s approach. Note that the president’s budget in February already assumed expiration of upper-income tax cuts after 2012 as well as a limitation on itemized deduction by higher-income taxpayers; we assume the discussion of those issues in his speech relates to those proposals.

What expenditures would be reduced or eliminated? How much would  rates be lowered? As low as Bowles-Simpson recommends? Again, I dunno.   How this is structured also determine ether the middle-class would have a higher tax burden. But maybe Obama, as he is hinting, is promoting the theory that only higher tax rates are tax hikes, not fewer tax breaks.

Mandatory spending: Less deficit reduction than the House proposal. President Obama proposes $340bn in savings from additional health reforms over the next ten years. This does not appear to involve the fiscal commission’s recommendations. Instead, it assumes savings from setting an even lower spending growth goal of GDP + 0.5% for the Independent Payment Advisory Board (IPAB) set up under last year’s health reform law, as well as $100bn in Medicaid savings and $200bn in Medicare savings. This is a much lower aggregate deficit reduction amount from this segment of the budget than included in the House Republican budget resolution, which proposes $1.1 trillion in savings compared with the President’s FY2012 budget. The President proposes $360bn in savings through 2023 (i.e. over twelve years) in “other mandatory” spending, compared with the House proposal to reduce spending by $1.8 trillion through 2021 (i.e. over ten years).

This is a combination of placing greater faith in Obamacare cost controls and across-the-board spending cuts. But the cuts are not enough long-term to prevent Obama or a Democratic successor from having to raise middle class taxes.

Social Security: No near term changes. Like congressional proposals, the president does not propose any near term savings from the Social Security program, though he endorses long-term reform.

New Obama budget plan leaves U.S. fiscal future fuzzy

Apr 13, 2011 22:09 UTC

This is my quick take on President Obama’s budget speech that went out to Reuters clients (more to come):

President Barack Obama’s budget do-over is certainly an upgrade. U.S. deficits a decade from now would be sharply lower than under his previous plan. But the approach is still full of accounting gimmicks, and ducks making necessary long-term fixes. That tactic may be good politics as the president heads into an election year, but it also shows a worrying lack of urgency.

The slight fiscal progress of Obama’s first attempt earlier this year mostly evaporated once the Congressional Budget Office re-ran the numbers. Debt as a share of the economy would have risen to 87 percent in 10 years versus 62 percent last year, according to the CBO. This updated version of his budget would aim to limit deficits to 2.5 percent of GDP in 2015 and 2 percent toward the end of the decade. That would more or less stabilize debt ratios at current levels and mimics the bottom-line numbers of the plan recently put forward by House Republican leader Paul Ryan.

But Obama sketches a starkly different path. While the GOP would torpedo the president’s healthcare legislation and cut taxes, the president counts even more heavily on his health reform’s as-yet unproven cost controls. He would also raise tax rates and limit deductions for the rich. In this way, Obama echoes the recommendations of his debt panel, which called for a mix of spending cuts and tax increases.

But there are dodges both big and small. Most federal budgets are calculated over 10 years, not 12 as the White House did this time. Choosing a longer term somewhat flatters Obama’s debt reduction objectives. Obama also offered no plan to substantially reduce America’s debt load. Many economists think this, at 40 percent of output, is plenty outside of recession or financial crisis. But it would be hard for Obama to hit that level without raising taxes on the middle class, which he’s promised not to do. The Ryan plan, by contrast, outlines a multi-decade glide path to solvency. Republicans see a debt crisis looming, while Democrats wager the United States still has some fiscal breathing room.

The political take is obvious. The president wants the public to perceive his plan as “balanced” next to the GOP’s “extreme” version. But hopefully, this second, more ambitious take will lead to active negotiations with the GOP and the bipartisan Gang of Six in the Senate. Voters and markets should demand no less.

New Obama budget still leaves fiscal future fuzzy

Apr 13, 2011 20:36 UTC

By James Pethokoukis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

WASHINGTON — President Barack Obama’s budget do-over is certainly an upgrade. U.S. deficits a decade from now would be sharply lower than under his previous plan. But the approach is still full of accounting gimmicks, and ducks making necessary long-term fixes. That tactic may be good politics as the president heads into an election year, but it also shows a worrying lack of urgency.

The slight fiscal progress of Obama’s first attempt earlier this year mostly evaporated once the Congressional Budget Office re-ran the numbers. Debt as a share of the economy would have risen to 87 percent in 10 years versus 62 percent last year, according to the CBO. This updated version of his budget would aim to limit deficits to 2.5 percent of GDP in 2015 and 2 percent toward the end of the decade. That would more or less stabilize debt ratios at current levels and mimics the bottom-line numbers of the plan recently put forward by House Republican leader Paul Ryan.

But Obama sketches a starkly different path. While the GOP would torpedo the president’s healthcare legislation and cut taxes, the president counts even more heavily on his health reform’s as-yet unproven cost controls. He would also raise tax rates and limit deductions for the rich. In this way, Obama echoes the recommendations of his debt panel, which called for a mix of spending cuts and tax increases.

But there are dodges both big and small. Most federal budgets are calculated over 10 years, not 12 as the White House did this time. Choosing a longer term somewhat flatters Obama’s debt reduction objectives. Obama also offered no plan to substantially reduce America’s debt load. Many economists think this, at 40 percent of output, is plenty outside of recession or financial crisis. But it would be hard for Obama to hit that level without raising taxes on the middle class, which he’s promised not to do. The Ryan plan, by contrast, outlines a multi-decade glide path to solvency. Republicans see a debt crisis looming, while Democrats wager the United States still has some fiscal breathing room.

The political take is obvious. The president wants the public to perceive his plan as “balanced” next to the GOP’s “extreme” version. But hopefully, this second, more ambitious take will lead to active negotiations with the GOP and the bipartisan Gang of Six in the Senate. Voters and markets should demand no less.

The anti-Paul Ryan plan

Apr 12, 2011 18:37 UTC

The Congressional Progressive Caucus has finally released its response to Rep. Paul Ryan’s Path to Prosperity.  ”The People’s Budget”  is almost like a parody of a liberal Democratic plan. It proposes raising taxes by $4 trillion over ten years and cutting spending (mostly defense) by $900 billion. (Ryan would cut spending by $6 trillion.) It would take tax revenue as a share of GDP to 22.3 percent vs. a previous all-time high of 20.9 percent in World War Two. Even worse, the plan only goes out a decade since its tax hikes still wouldn’t balance the budget long-term because it ignores healthcare reform.

CPC

COMMENT

If ”The People’s Budget” is a parody of a liberal Democratic plan, then the “Path to Prosperity” is a parody of “Atlas Shrugged”, a poorly written work of fiction that Paul Ryan has read too many times.

Posted by Yellow105 | Report as abusive

Just how worrisome is the U.S. growth slowdown?

Apr 12, 2011 18:07 UTC

After taking a look at the new trade numbers, Wall Street firms are slashing their GDP growth forecasts for the first quarter of this year. Both Macroeconomic Advisers and Morgan Stanley now think growth will be just 1.5 percent. We are getting into dangerous territory, so says the Dallas Fed:

Does the slow growth necessarily foretell a double dip? Just as a bicycle requires momentum to stay upright, history tells us that once the economy slows to a sluggish growth rate, it will likely fall into a recession. This “stall speed” appears to be 2 percent annual real GDP growth. Every recession since 1970 has been preceded by expansion of less than 2 percent, though there was a false alarm in 1995. The second estimate of third-quarter GDP shows real output rising 3.2 percent over the past year.

And a chart illustrating the same point:

dallasfed

Will Obama endorse Bowles-Simpson debt plan?

Apr 12, 2011 16:14 UTC

Will President Obama finally endorse the debt plan of his own debt commission in his big speech tomorrow?

That’s the buzz today around Washington. But really, why wouldn’t he? The Bowles-Simpson plan would basically enshrine Obamacare and raise taxes to the highest level in American history (21 percent of GDP) — meeting two key Democratic goals.

heritage

No, it’s not the goofy all-taxes, all-the-time plan put forward by the House Progressive Caucus, but you would have to be pretty far on the liberal extreme not to be happy with the idea. An Obama endorsement would also set up a great contrast with Rep. Paul Ryan’s Path to Prosperity, which would shrink government, expand freedom and promote dynamic, entrepreneurial capitalism.

bschart

COMMENT

SCARE 20.12.2012

(Stop Corruption And Repression Effective 20.12.2012)

Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose.

That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened.

True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied.

In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on.

The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account.

This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over.

It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it.

Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution?

Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out.

Now, what demands are made if that scenario is to be avoided.

1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012.

2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012.

3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole.

When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.

Posted by linushuber | Report as abusive

Romney 2012: Is U.S. ready for its first buyout president?

Apr 12, 2011 16:12 UTC

Mitt Romney’s campaign launch for the Republican presidential nomination predictably avoided mentioning the Obamacare-like health plan he created as Massachusetts governor. But it also gently tiptoed around his financially successful career as a buyout boss. With the financial crisis still raw to voters, selling them on the first president to be drawn from the buyout barony will be tough.

Of course, if not for his successful run at Bain Capital, Romney wouldn’t be a leading player in the 2012 sweepstakes for the White House. It made him fabulously wealthy and provided a full BlackBerry of Wall Street and corporate contacts to tap for campaign cash. The eventual GOP nominee will need a bursting wallet as he or she faces off against a sitting president who might raise $1 billion to fund re-election.

Just as importantly, Romney’s time at Bain lets him uniquely position himself as a venture capitalist and corporate turnaround artist who understands how private-sector jobs are created. The messaging: A Mr. Fix-it for the U.S. economy vs. rivals who are all creatures of government.

But even Romney knows it isn’t quite that simple. During his video announcement, he pointedly says, “Sometimes I was successful and helped create jobs. Other times I wasn’t.” While Romney will highlight his winning investments, such as Staples and The Sports Authority, aspects of his business record are vulnerable to attack. Fixing companies, after all, sometimes means firing workers. During Romney’s failed 1994 U.S. Senate race, incumbent Democrat Ted Kennedy ran a series of ads with laid-off workers savagely denouncing him. “Basically, he cut our throats,” said one.

Romney also expects to be portrayed as little more than a financial engineer who made money for himself and partners by forcing acquired companies to take on debt to pay them a special dividend. To the average American, that may sound a lot like the exotic financial strategies that helped lead to the bank meltdown. Romney will counter, of course. But as the saying goes, a politician who is explaining is one who is losing.

Then there’s his healthcare plan, which the White House says, with what appears a hint of sarcasm, was a model for theirs. To many Republican voters, that alone disqualifies Romney from higher office. Back at Bain, he was known as a super-salesman. Selling Romney Inc. will be his most challenging pitch yet.

  •