Ethics & Public Policy Center

The President’s Plan: Higher Taxes, Deep Defense Cuts, and the Entitlement Status Quo

Published in economics21 on February 14, 2012


In the budget President Obama proposed yesterday, he once again chose to placate constituencies and promote an activist government agenda at the expense of getting the nation’s fiscal house in order. The budget forecasts a $1.3 trillion deficit for the current fiscal year—the fourth year in a row of trillion dollar deficits. The president is thus on track to pile up an astonishing $5.3 trillion in deficits during his first term, for fiscal years 2009 to 2012. For those who say he shouldn’t be held accountable for 2009 since he assumed office one-third of the way through it (and then promptly pushed through an $800 billion spending program), the cumulative deficit for the four year period 2010 to 2013 is nearly as bad—$4.8 trillion.

The fundamental problem in the federal budget is the relentless increase in entitlement spending. The administration’s apologists like to say that our fiscal problems stem from tax cuts, the Medicare drug benefit, and unfinanced wars. But this is not so. Over the past four decades, the federal government has collected revenue that has averaged 18 percent of GDP annually. In 1972, when total spending on Social Security, Medicare and Medicaid was 4.4 percent of GDP, there was plenty of revenue left over for other priorities of government, like national security. But today, the situation is very different. Spending on Social Security, Medicare, Medicaid, and the entitlements created in the health care law are expected to reach 10.2 percent of GDP in 2012, well over half of the normal tax take of the government. That’s the primary reason the government is now experiencing massive fiscal pressure.

The president’s budget does nothing to address this problem and, in fact, makes it much, much worse. According to the administration’s own figures, the president’s plan would increase entitlement spending to about $3.7 trillion in 2022, up from $1.8 trillion in 2008. On average, the president’s budget proposes to increase spending on this segment of the budget by 5.3 percent per year over the coming decade.

Spending on just Medicare and Medicaid in the president’s budget will increase from about $0.6 trillion in 2008 to $1.5 trillion in 2022, and even those figures are optimistic because the budget assumes that the arbitrary cuts in reimbursement rates for those providing services to Medicare patients can be sustained, in direct contradiction to the warnings issued by the administration’s chief actuary for the Medicare program.

According to the president’s numbers, the annual budget deficit would shrink nonetheless, from 8.5 percent of GDP in 2012 to 2.8 percent in 2022. If not from entitlements, where does this supposed deficit reduction come from? Two sources: higher taxes and deep reductions in defense spending.

The president wants to push through another round of massive tax hikes, to pile on top of the nearly $600 billion in tax increases over the coming decade that he already pushed through as part of the health care law. Together, these tax hikes plus the assumption of normal economic growth would push total federal revenues in 2022 to 20.1 percent of GDP, more than 2 percentage points above the average from the last four decades. The U.S. has never maintained tax collection at such a level on a sustained basis.

At the same time, the budget calls for severe cuts in national defense and security spending, from 5.6 percent of GDP this year to 3.4 percent in 2022. Of course, reducing security spending by more than a third over the coming decade would unquestionably improve the nation’s budget outlook. But such a downsizing could only occur if a highly unusual period of tranquility suddenly materialized across the globe. If, on the other hand, the next decade in world history is more like what it has been for millennia, then it would be both financially foolish and utterly irresponsible to claim credit for a fictitious “peace dividend” in outyear budget projections. But, of course, that’s exactly what the Obama budget does to make the deficit forecast look better than it really is.

When the unprecedented tax hikes and the unrealistic defense cuts are set aside, it’s clear that the Obama budget would put the country on a path to fiscal ruin. In 2022, if taxes stay at their historical level and defense spending is held constant with today’s level, then the deficit in the Obama plan would be 7.1 percent of GDP instead of 2.8 percent—well above the level that would be dangerous for the U.S. economy if sustained over several years.

This budget plan fits with the pattern of the Obama presidency. It is aimed more at creating contrasts with the GOP than solving the nation’s budget problem with bipartisan solutions.

It doesn’t have to be this way. Indeed, the steps needed to get our fiscal house in order are well known on both sides of the aisle. The tax law needs an overhaul to broaden the base, lower rates, and promote stronger economic growth. The health entitlement programs need to move away from government command-and-control approaches that have failed and toward a system of defined contribution payments to the programs’ beneficiaries that promotes genuine cost discipline within a functioning marketplace. And Social Security needs to be updated to reflect demographic reality.

For a brief moment, it seemed that the president wanted to take on this challenge and pursue just such an agenda. In 2010, he appointed the Bowles-Simpson commission to come up with a comprehensive budget plan to restore long-term solvency to the government. Not surprisingly, the plan approved by that commission called for serious tax and entitlement reforms as well as deep cuts in every corner of the federal budget.

But instead of embracing the Bowles-Simpson plan, the president changed course and chose to ignore entirely the recommendations of the panel he had initiated to great fanfare. The president then spent all of 2011 attacking the GOP’s version of long-term budget reform instead of offering a serious plan of his own, thus making it all but impossible for a bipartisan consensus to form in Congress. The president’s 2013 budget plan fits this pattern, providing stark contrasts with the GOP at the expense of real progress.

At some point, this approach will catch up with the president. He was elected to lead, regardless of the political consequences. And voters will hold him accountable for results, not empty rhetoric. As matters stand, he is likely to go down in history as the president who hastened the day of the nation’s financial collapse.

James C. Capretta is a fellow at the Ethics and Public Policy Center and project director of e21’s ObamaCare Watch. He was an associate director atthe Officeof Management and Budget from 2001 to 2004.

Comments are closed.



RELATED PUBLICATIONS