The politicians in Washington, DC have an advantage over many of us: They don’t work for a living. So they have plenty of free time to figure out ways to take money away from those of us who do. Working stiffs like us don’t have much time to stop them. We need a national Tea Party to check and balance the Kleptocrat Party running amuck on both sides of the aisle of our nation’s capitol. On April 15, there were tea parties in several cities around the nation to protest ballooning federal deficits and rising taxes. Most of the demonstrations were held during lunch time when people could get away for an hour from work!
The authors of our Constitution intended that it would protect the liberties of the individual and limit the power of the government. They intentionally designed a political system of checks and balances so that it would more often than not result in gridlock. Both the Democrats and the Republicans, and all the special interest groups that support them, have been chipping away at this system for decades. Rather than fight one another to a draw, they’ve come up with lots of compromises, and have compromised the checks and balances system. They couldn’t have done so if their spending were constrained by a balanced budget amendment. Nevertheless, until this year, there was some sense of fiscal limits, if not discipline left in Washington. This is no longer the case.
The current Administration has proposed, and Congress is likely to enact, a dramatic expansion of social welfare spending over the next 10 years. At the same time, more and more Americans are getting excused from paying any taxes if their incomes are low enough. Many may effectively benefit from a negative income tax. That leaves fewer and fewer Americans to pick up the government’s tab. These remaining taxpayers may be relatively well off, but there aren’t enough of them to pay the government’s bills. So the federal government is scrambling to find new taxes, though such taxes won’t come close to filling the gap between federal spending and revenues. Let’s review some recent developments focusing on the government’s trivial pursuit of additional nickel-and-dime revenues:
(1) The Office of Management and Budget now estimates that the deficit will be $1.84tn this fiscal year, a 5% increase over the Administration's estimate released in February.
(2) Over the next 10 years, the federal deficit is projected to total nearly $10tn. The Administration proposes to cut taxes by $736bn for middle-income families and $99bn for small businesses during the same period.
(3) Over the next 10 years, the Administration hopes to raise $210bn by closing tax loopholes for multinational corporations. This is likely to put US corporations at a competitive disadvantage since most other countries don't require their companies to pay taxes on foreign earnings.
(4) Over the next 10 years, $58bn in additional tax revenue will come from changing the way assets in estates are valued ($24.2bn), from modifying rules for some life insurance company products and contracts ($12.8bn), and from changing the way income is treated for some dealers of equity options and commodities ($2.6bn).
(5) Treasury officials also recently outlined plans to eliminate $36bn in tax breaks for oil companies for activities such as exploration and drilling and to reinstate excise taxes used to help clean up federal Superfund environmental sites. The excise taxes expired in 1996 and would generate about $16.7bn over 10 years.
(6) On April 20, President Obama convened his Cabinet for the first time, and ordered its members to identify a combined $100mn in budget cuts over the next 90 days. That’s millions, not billions.
The long-term problem is that the federal government continues to expand nondiscretionary spending on more social welfare programs. These are open-ended commitments that are politically difficult to cut. They also create an unhealthy codependence as more Americans depend on the government, and politicians expect that the beneficiaries of government spending will keep them in office. In personal income, government social benefits were equivalent to 31% of wages and salaries in March. That’s a record high. During the 1960s, it was around 10%. By the 1980s, it was around 20%. The gap between these benefits and employee and employer payroll taxes to pay for them widened from nearly zero at the start of 2001 to a record $514.5bn in March of this year.
This morning, Bloomberg reports that the Social Security trust fund will run out of assets in 2037, four years sooner than previously forecast. Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago. The current Administration claims that their reforms of the health care industry will lower growth in health-care costs even as they push to make sure that all Americans have access to “affordable” health care. In a statement yesterday, Treasury Secretary Tim Geithner promised that after pulling off this miracle, the President will “build a bipartisan consensus to ensure the long-term solvency of Social Security.” David Axelrod, a senior White House adviser, said that Obama is “committed to a serious effort to confront that issue.” Good luck with that. Then again, it took a conservative president to recognize China. Maybe a liberal one can finally reform Social Security by imposing means testing. That should be popular with all the populists that support this Administration’s social welfare policies.
(H/T Yardeni Research)
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