James Pethokoukis

Politics and policy from inside Washington

Why Obama’s tax pledge is bogus

Apr 12, 2011 01:42 UTC

Who does Team Obama think it’s fooling? Budget experts are already scoffing at the idea that the White House can somehow deal with America’s long-term budget woes without either a) raising taxes on the middle-class or b) adopting a Paul Ryan-style restructuring of entitlements.

But, amazingly, that’s just what White House senior adviser David Plouffe claims his boss is going to do on Wednesday in a big speech. Recall that this will be President Obama’s second bite at the apple. His previous attempt, released earlier this year, would have added an eye-popping $9.5 trillion of new borrowings over a decade, increasing debt as a share of output to 87 percent in 2021.

But that outline just looks like a placeholder now. Republican Ryan has proposed cutting Obamacare and trillions of dollars of other federal spending to keep the debt-to-GDP ratio steady at around 69 percent over the decade, adding $5.1 trillion in new borrowing and leaving a slim annual deficit of 1.6 percent in 2021 vs. a historically high 4.9 percent for Obama. And while Obama previously offered no long-term debt reduction plan, Ryan’s “Path to Prosperity” would actually eliminate outstanding U.S. debt by the 2050s — even using the slow-growth forecast of the Congressional Budget Office.

Suppose Obama actually chooses to at least match Ryan and stabilize the debt over a decade. And assume he picks the formula advocated by his debt panel, $2 in spending cuts (spread among defense, Social Security, Medicare and Medicaid) for every $1 of higher taxes. Getting there by taxing only wealthier Americans would mean nearly doubling tax rates at his own line of demarcation – households earning more than $250,000 a year, according to the Tax Policy Center.  (This analysis assumes a top marginal rate of 67 percent would have no impact on economic growth. Good luck with that.)

Or maybe Obama could adopt the balanced-budget plan being put forward by liberal House Democrats. In addition to gutting defense, the plan of this group of so-called progressives would, as Philip Klein of Washington Examiner describes it, do the following:

To extend the long-term solvency of Social Security, it would propose dramatically increasing payroll taxes on both the employer and employee side, and funnelling the money into even more generous benefits. … Yet the tax increases wouldn’t end there. The People’s Budget would rescind last year’s tax deal to raise rates on higher income levels, boost taxes on capital gains and dividends, increase the estate tax, institute three “millionaire tax rates,” with the highest reaching 47 percent, tax corporate foreign income, impose a “financial crisis responsibility fee,” and institute a “financial speculation tax. Overall, taxes would rise to 22.3 percent of the economy, compared with 18.3 percent under the Ryan proposal.

Obama won’t go that far, especially since his economic team doesn’t believe it’s necessary to dramatically reduce the deficit anytime soon. Important, but not urgent. But he might well subject the full earnings of wealthier American to the payroll tax. (The cap is currently around $107,000.) In addition, expect the president to suggest eliminating all manner of business tax breaks. He might advocate cutting the top corporate rate, too, but not enough to prevent there being a net tax increase. Wall Street and Big Oil better brace themselves.

But 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.)

You almost assuredly won’t hear such a radical proposal from Obama on Wednesday. And that’ll mean he won’t be offering a serious, long-term budget blueprint, just a purely political way of framing the 2012 election. Obama can reject the Ryan plan or a VAT, but not both.

COMMENT

I saw Ryan on Meet the Press yesterday (4/10).
Ryan said that Medicare will be insolvent in nine years
at the rate that it is on now. This was one of the examples he used to explain why tax and spend won’t get us out of our grief. Reform must be done.
Ryan was using the GAO figures.

Well, here’s a place where there needs to be some discussion. Just letting the people above 55 do things
the old way, and then all the younger ones pretty much
go into privatization isn’t a good solution.

This competition that everyone believes will lower the price of health care (the invoices that doctor’s bill)
is not going to materialize.

For instance, no one in our state of WI can have an x-ray without one of not-too-many specially certified radiologist hired to look at the film. Several years ago, the guy that did mine charged me $500 for five minutes work. The hourly rate was $6,000 per hour. It isn’t that price now.

My husband’s MRI cost well over $4,000 and the
reading bill for that was $1,000 (for probably 5 minutes work.)

It is state law that requires this charge. It is medical schools that restrict the number of radiologists in the first place.

Economics…supply and demand…this is a gold mine for medical facilities.

I’m thinking that –just as power and light companies
are regulated—the medical industry has to be as well.
Medical industries are somewhat of a monopoly and they shouldn’t be allowed to gouge the American public beyond what they can afford.

Privatizing ANY medical is redundant. Sure the costs
are thrown off the Federal Government’s back…some
onto the state’s back…but privatizing is avoiding the
one cost that’s even worse than the deficit by
telling seniors-to-be that “You’re on your own–Good luck.”

The same goes for this horrible idea of privatizing social security. What a field day for people like
Romney’s old hedge fund company, Bain!

You want to have a class system in America…
well…you just fix the federal money ills with
unregulated privatizing. And if you’re gonna
regulate, then regulate fair and square across the board, none of this exception stuff creating loopholes and (oh)– You know the usual ifs, and, and buts,
for the Senator Frists out there.

Posted by limapie | Report as abusive

Bending the debt curve

Apr 8, 2011 19:45 UTC

Some budget plans do, some don’t (via e21):

e21chart

COMMENT

Ryan’s budget won’t stabilize the public debt because it would sink the economy into a depression.

Posted by GetpIaning | Report as abusive

Is the Ryan Plan a 73-page suicide note?

Apr 8, 2011 19:38 UTC

Charles Krauthammer asks the question:

In 1983, the British Labour Party under the hard-left Michael Foot issued a 700-page manifesto so radical that one colleague called it “the longest suicide note in history.” House Budget Committee chairman Paul Ryan has just released a recklessly bold, 73-page, ten-year budget plan. At 37 footnotes, it might be the most annotated suicide note in history.

That depends on whether (a) President Obama counters with a deficit-reduction plan of equal seriousness, rather than just demagoguing the Ryan plan till next Election Day, (b) there are any Republicans beyond the measured, super-wonky Ryan who can explain and defend a plan of such daunting scope and complexity, and (c) Americans are serious people.

My guesses: No. Not really. And I hope so (we will find out definitively in November 2012).

Again, is the Ryan Plan a blueprint only Ryan can sell?

COMMENT

Are you joking? The only thing recklessly bold about Ryan’s plan is that it doesn’t do anything meaningful. According to the CBO’s analysis, Ryan’s plan will not balance the budget until sometime between 2060 and 2080, and that’s while assuming a lot of rosy things that nobody can possibly predict. Moreover, while on this path Ryan’s plan will add an additional $63 trillion to the national debt. How will that affect the economy? What if the dollar crashes and countries like China won’t buy our securities anymore… then what? This plan is a sham.

Posted by AggieEngineer | Report as abusive

Just how fragile are Obama’s approval ratings?

Apr 8, 2011 18:58 UTC

Quite, says my pal Jay Cost over at TheWeeklyStandard:

President Obama’s overall job approval is split 47-47, but the numbers underneath it are not good at all. On the economy, AP-GfK has him at -6, Gallup at -17, Quinnipiac at -26, and CBS at -14. On health care, AP-GfK has him above water (+4), but Gallup and Quinnipiac have him at -17 and -16, respectively. Meanwhile, check out the right track/wrong track numbers, which are as negative as they have been at any point during Obama’s tenure.

All this tells me that those top line approval numbers are very, very weak for the president. They are probably being propped up by people who are not happy with the way things are going, don’t particularly like the job the president has done with specific issues, but have not yet connected all the dots. Just wait. As the Republican nomination battle begins in earnest, you’re going to see Jon Huntsman, Tim Pawlenty, Mitt Romney, and others making the same kind of explicit argument that President Obama is a failure. In other words, they’re going to connect the dots for people, just like Trump did in this interview.

What happens to Obama’s job approval then? What happens when these Republican nominees start linking high unemployment, high gas prices, out of control deficits, and partisan gridlock to Obama?

And Jay can also add in rising interest rates  (Fed could be tightening in 2012) and the lousy real estate market. A long way to go to November 2012.

rcp0411

Why a government shutdown is even possible

Apr 8, 2011 18:50 UTC

What a very different political world it would be right now if President Obama had a) supported his own debt commission, b) devised a 2012 budget that made deep spending cuts over near and medium term, and c)  listened to his own economic team and suggested a Social Security fix. But with no leadership from the White House on the horizon, it made all that much more important for the Tea Party wing of the GOP to dig in and push real spending cuts now.

But certainly the Obama political team thinks the president would benefit from a shutdown, removing the political impetus to act. Plus, this administration simply does not believe the debt is a big problem right now, an important problem but not an urgent problem. Clearly …

debt0411

Some context on the current budget battle

Apr 7, 2011 21:00 UTC

This graphic from the good folks at Hamilton Place Strategies adds some perspective on the billions and trillions at play:

hps

Ryan plan would boost U.S. economic security

Apr 7, 2011 20:49 UTC

It’s intriguingly simple: Limit future increases in Medicare and Medicaid healthcare spending to cut debt. That’s the easy-to-understand core of House Budget Committee Chairman Paul Ryan’s budget plan, The Path to Prosperity. But the idea risks a voter backlash if medical inflation doesn’t slow, too. Otherwise, quality and service will suffer, badly fraying the social safety net. Republican Ryan thinks injecting some needed market discipline rather than sticking with President Barack Obama’s bureaucratic tinkering will do the trick. And he’s right.

Federal government healthcare expenditure for those two programs could more than double over the next four decades to nearly 14 percent of GDP, according to the Congressional Budget Office. The CBO says the new plan devised by House Budget Committee Chairman Paul Ryan would keep spending at around 5 percent of output.

ryan

Or to put it another way, without the Ryan plan, Medicare and Medicaid are a $58 trillion (net present value through 2085) unfunded liability. These two programs are the main reason the CBO sees America’s debt-to-GDP ratio hitting 344 percent (assuming the economy doesn’t collapse first) in 2050 vs. 62 percent in 2010. But with the Ryan plan, the entire federal debt is just 10 percent of GDP in 2050 before disappearing later that decade. Problem solved.

usa

There’s no fiscal miracle here. Ryan accomplishes this feat through simple math. He would increase revamped subsidies to seniors and the poor at rates far below the predicted pace of healthcare inflation. That has led the CBO to raise an eyebrow, wondering if such effective reductions would be politically sustainable. Oldsters would, for instance, eventually bear a far larger share of personal healthcare costs than under the current Medicare program.

But what the CBO misses is that Ryan bets he can square the circle by slowing medical inflation through increased competition. Instead of Medicare providing insurance, retirees would pick their own government-certified private plan, helped by a fixed subsidy from Washington. Fancier coverage would cost more. And in exchange for some protection from big bills, seniors would pay a greater share of small ones. Both features might encourage bargain hunting among competing plans. Republicans also want to lessen the role of middlemen in medical billing. Economists think heavy intermediation makes people less aware of the costs and therefore allows healthcare prices to rise faster than they should.

Competition generally works in the other five-sixths of the U.S. economy. And it should also in healthcare if government loosens its grip. Prices for laser eye surgery, a procedure commonly paid directly out of pocket, have fallen sharply over the past two decades. Then there’s the Swiss example. There citizens choose, aided by subsidies, among competing private insurers who must provide a basic benefits package. Ryan’s Medicare reform proposals bear more than a passing resemblance to that system. Costs have risen more slowly in Switzerland than the United States. The Swiss also devote just 11 percent of their economy to healthcare, counting both government and private spending. While that’s a lot compared to the UK and Scandinavia, it’s thriftier than America’s 17 percent and rising.

The only real differences between Ryan’s new plan and the one he co-authored with Clinton administration economist Alice Rivlin, is that it’s a bit stingier on increasing the subsidies and it doesn’t have a public option. That, along with the Swiss feel to it, is evidence that what Ryan has proposed is a rather centrist plan that Democrats should flock to if they want to preserve economic security for all Americans.

COMMENT

There is nothing in Ryan’s “Path To Penury” that has not been circulated in policy circles for decades. Almost everything in the plan has been tried and has failed. The plan ignores obvious economic realities, such as the bubble-induced recession that has left 25 million people unemployed or underemployed. It gives all the benfits the rich and powerful, while destroying the limited economic security enjoyed by tens of millions of middle class families.

He wants to lower the top tax rate from the 39.6 percent in current law to 25 percent. This will means billions of dollars a year in additional spending money for Wall Street bankers, CEOs of major corporations and other major campaign contributors.

At the same time, he wants to abolish Medicare and replace it with a voucher program that will rapidly fall behind the rising costs of health insurance and health services. Medical bankruptcies will skyrocket.

Oh, and he does propose cutting the $7.8 trillion in defense spending projected for the next decade by 1 percent. Apparently Paul Ryan believes in a strong safety hammock for the defense industry.

I’ll say this. The fawning coverage of America’s corporate media of it’s new rising star does jump-start
the debate over how to rebalance the government budget. But this plan falls apart under the most basic analysis.

The Heritage Foundation, who helped Ryan craft the Path To Penury, scrubbed its website as soon as real budget analysts started pointing out the impossible numbers in the projections. It’s not economic policy. It’s economic ideology. Which is why we will see daily articles by Mr Pethokoukis telling us how great it is.

Posted by GetpIaning | Report as abusive

The liberal budget response to Paul Ryan

Apr 7, 2011 18:54 UTC

Philip Klein, now at the Washington Examiner, scores a great scoop today with a peek at how the House Progressive Caucus plans on responding to the Ryan Path.  The liberal blueprint claims to balance the budget by 2021, mainly through a laundry list of tax increases that would raise government revenue as a share of GDP to a record high of 22.3 percent — four points higher than the historical average. (This also assume the tax increases have zero impact on growth.)

But the fiscal problem is not merely making the numbers balance out over ten years, but also over the rest of the century. That will require spending less on entitlements and more economic growth. But this plan does give insight into the sort of budget Washington liberals would prefer. Here is Phil:

Overall, taxes would rise to 22.3 percent of the economy, compared with 18.3 percent under the Ryan proposal.

The plan would also build on Obama’s most notable initiatives. It includes an additional $1.45 trillion in economic stimulus spending. On health care, the plan would add a government-run plan, or “public option,” to Obamacare and have the government negotiate drug prices.

Yet while other parts of government would grow, the defense budget would be gutted. The proposal would “reduce baseline defense spending by reducing strategic capabilities, conventional forces, procurement, and R&D programs.”

If liberal activists and Democratic lawmakers rallied around this plan, or something similar, then there could be an honest debate contrasting Ryan’s vision of lower taxes and entitlement reform with liberal plans to raise taxes, slash the military and further expand the role of government.

COMMENT

re: “American exceptionalism…”

Electrobahn must be living in a parallel universe.

Unless you’re in the top 1%, you’re falling further and further behind. There’s been a tremendous shift in our country, the middle class is largely wiped out, and the poor are worse off than they’ve been in a long time.

According to the IRS, in 1980 the top 1% made less than 1/2 what the bottom 50% made. Now they make 60% MORE than the bottom 50%.

Warren Buffett says the rich have never had it this good. Time to push the pendulum back to the middle.

Posted by Adam.Smith | Report as abusive

How the economy may undermine Obama’s 2012 reelection hopes

Apr 7, 2011 16:15 UTC

It’s not just the labor market that worries Team Obama:

“We are making progress on jobs and need to make more progress on jobs,” said David Axelrod, a former senior White House aide who is part of Obama’s 2012 campaign team. “But people are also grappling with stagnant wages and rising prices. That’s a legitimate, important concern for people and we have to pay close attention to it.”

Further, Jay Cost of the The Weekly Standard elaborates in great detail on something I have been writing about, how weak income growth could hurt Obama’s 2012 chances:

So basically, here is where we are. Policymakers have spent the last three years tossing not millions, not billions, but trillions of borrowed dollars at the output gap in the American economy. And what is the result? A fair measurement of unemployment comes in higher than anything we’ve seen since the Great Depression. Real wages are in decline. Food stamp enrollment is at an all time high. Jobs are coming back, but at a painfully slow rate and without very good pay. Growth for this year and next are expected to come in below the historical trend. We’ve created a huge budget deficit, as we’ve borrowed from future generations to cover the output gap from the last couple years. And let’s not forget this one (not that we ever could!

So, for those analysts in the press who think that Obama will win in 2012 if incomes are still being propped up by massive (deficit financed) government spending, real salaries are declining or flat, unemployment is far above the historical trend, good paying jobs are scarce, the deficit is at an all time high, and the president has no real idea about what to do (except, of course, high speed rail), I have only this to say: you might want to think twice before you place that wager. This president is not yet out of the woods on the economy. Not even close.

The piece has some great charts, but I particularly like this one which shows any income bounce is all sugar and steroids:

costchart

COMMENT

James, they will not let me post.

Posted by madmilker | Report as abusive

The Ryan Path vs. Bowles-Simpson

Apr 5, 2011 19:15 UTC

Americans for Tax Reform has created a handy chart comparing the features of both:

atr

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