Wednesday's Democratic presidential debate between Sens. Hillary
Clinton and Barack Obama featured pointed barbs, exchanges and
one-liners. What it lacked was accurate and articulate statements
on the economy.
Clinton: "[W]e now have the largest budget deficit
we've ever had, $311 billion. We went from a $5.6 trillion
projected surplus to what we have today, which is a $9 trillion
debt."
This is wrong on several counts. By calling the current budget
deficit the largest in American history, Sen. Clinton absurdly
fails to adjust for any economic growth - or even inflation - over
the nation's 232-year history. Such analysis would not pass
freshman economics. Using standard measurements, this year's
projected budget deficit of 3 percent of the economy is a far cry
from the actual record 30 percent level in 1943 during World War
II.
And even using her unadjusted numbers, Clinton's mid-year figure
has not yet passed the final 2004 budget deficit of $413
billion.
Additionally, Clinton accuses the Bush administration of turning
the $5.6 trillion 10-year surplus that was projected on paper in
2001 (and therefore never actually existed) into a $9 trillion
debt. But the latter figure represents the total cumulative federal
debt that has been building since the early days of the Republic.
By linking those figures, Clinton effectively blames the current
administration for budget policies dating back to the 1803
Louisiana Purchase.
Obama (After the moderator suggested that capital gains tax
hikes would reduce revenues): "I would look at raising the capital
gains tax for purposes of fairness."
This was the most astonishing statement of the debate. It's one
thing to advocate large tax increases in order to fund priority
spending. Yet after tacitly acknowledging that capital gains tax
hikes would likely reduce tax revenues, Sen. Obama was not
deterred. He would nearly double these tax rates for the stated
purpose of reducing the income of investors -- even if it harms the
economy and fails to produce a dollar of new tax revenues.
If this tax hike caused capital gains revenues to fall, would
Obama actually reduce priority spending to "pay for" this tax
increase? How many federal programs would he sacrifice towards the
goal of reducing investor incomes?
Clinton: "That's why I'm in favor of much more
college aid, not these outrageous predatory student loan rates that
are charging people I've met, across Pennsylvania, 20, 25, 28
percent interest rates."
This claim is simply implausible. The vast majority of student
loans are provided or guaranteed by the Department of Education,
with interest rates well under 10 percent. In fact, President Bush
recently signed another student loan expansion dropping the
interest rate on the most popular student loan program from 6.8
percent in the current school year to 3.4 percent by 2011. There
has been only one reported example of a 28 percent interest rate,
and even that was calculated using non-traditional accounting
methods. This does not justify giving voters the false impression
that typical college students are paying 28 percent interest
rates.
Obama: "What I have proposed is that we raise the cap on the
payroll tax, because right now millionaires and billionaires don't
have to pay beyond $97,000 a year … [which] only 6 percent
of the population does."
Yes, only 6 percent of households will earn more than $97,000
this year. But many more would pass the income threshold for this
tax increase at some point in their working careers. Glenn Hubbard,
former chairman of the President's Council of Economic Advisors,
has noted that more than one-quarter of Americans move into a
higher tax bracket each decade. Most workers' incomes start low and
then move up during their careers, before falling back at
retirement. Many more than 6 percent of households would face this
tax increase over the years.
Under Obama's proposal, these families would face a staggering
12.4 percentage point tax increase on all incomes over the
threshold. This dwarfs the 4.6 percentage point tax cut that
upper-income families received in the 2001 and 2003 tax cuts (which
he would also repeal), Combined with the near-doubling of
investment taxes, Obama's policies may amount to the largest tax
increase in American history -- all to fund new spending, rather
than deficit reduction.
Brian Riedl is
the Grover M. Hermann fellow in federal budgetary affairs in the
Roe Institute for Economic Policy Studies at The Heritage
Foundation (heritage.org).