Presidents Budget: Two Months Late and Trillions of Dollars Short
The Obama fiscal year 2014 proposed budget was not just a day late and a dollar short – it is two months late and trillions of dollars short.
The budget calls for more spending and more taxation than the Congressional Budget Office baseline, and it leaves the debt-to-GDP ratio at 73% ten years from now. This modest projected 1% percentage improvement to the current 74% debt-to-GDP ratio occurs only because of dramatic increases in taxes and overly optimistic economic assumptions.
Let’s look at taxes first. The president’s budget contains nearly $1.1 trillion in new taxes over ten years on businesses of all sizes. Many of these proposed tax hikes are the same old tired proposals that have gone nowhere in Congress.
They include $583 billion in tax increases on successful individuals and small businesses. And don't forget that this amount is in addition to more than $600 billion of new taxes over 10 years already in effect as a result of the fiscal cliff legislation passed at the beginning of the year. In addition, the president calls for a $16 billion tax hike on investors and hedge fund managers and a $59 billion on banks. Hiking taxes on job creators, successful business owners, and people and institutions that invest in promising companies is no way to encourage growth and innovation.
American companies that do business globally are also targeted by the president’s budget. They would face $157 billion in new taxes over ten years, up from $148 billion in the president’s budget from last year. In addition, the president one again reiterates his support for an international minimum tax, which he championed in his 2012 tax reform white paper.
What’s more, the president continues to embrace a worldwide system of taxing income, which potentially subjects overseas income to double taxation, despite urgings from the business community, the President’s now disbanded Jobs Council, and his Export Council to adopt a territorial system of taxation. We are the last major industrialized country with a worldwide system. Having the world’s highest corporate tax rate AND being the only major industrialized country with a worldwide tax system hurts our competitiveness.
And, once again this year, the Obama budget has it out for oil, gas, and coal companies, which collectively would see tax hikes of $44 billion over ten years.
The president’s budget purports to want corporate tax reform, but it neither calls for reform for smaller businesses nor offers much in the way of tax cuts. Instead, it champions tax preferences that are of little benefit to small businesses as a whole and pick winners and losers and would bestow preferences on specific industries and geographic locations. This is not a recipe for good tax policy. Businesses need comprehensive tax reform, which means addressing both the corporate and individual sides of the code.
Debt, Deficits, and Economic Assumptions
Let’s examine the proposed budget’s impact on the debt and deficits. Projected deficits outstrip economic growth and continue to add to outstanding debt as a percent of GDP for the next three years. Beyond that period, the president’s proposal slowly reduces the debt-to-GDP ratio but only by ever increasing taxes. Spending as a percent of GDP rises throughout the final years of the projection.
The president’s deficit projections are based on economic growth at or above 3.5 % from 20014 until 2017, and then assume a gradual reduction to 2.5% – a growth rate higher than the average of this recovery thus far.
Despite these relatively robust growth assumptions, the budget assumes no increase in inflation. And it assumes interest rates that remain below their 30-years averages at both the long and the short end of the maturity spectrum. Because of these rosy assumptions, debt service for 2023 in the Administration’s forecast is almost $100 billion less that the CBO baseline.
What the country needs most is an approach by Washington that expands economic growth, creates jobs, and lifts our entire economy. Unfortunately, the president’s budget expands the government at the expense of American workers, families, and businesses. The never-ending quest for higher taxes will depress growth in the private sector and encourage more irresponsible spending, which will drive our country deeper into debt. Although we appreciate the president’s recognition that entitlement spending is the main driver of our debt and deficits, the budget contains no serious reform to these programs to fit the demographics of the country.
About The Author: Marty Regalia is The US Chamber of Commerce’s Chief Economist