March 12, 2010

March 12, 2010 | Commentary on Budget and Spending, Taxes

Rising Taxes Still Wouldn't Keep Up With New Spending

In the blizzard of numbers and analyses surrounding President Obama's new budget proposal, two items stand out.

First, the budget would raise taxes by $3 trillion over the next decade. Second, the national debt would still double over that period.

That $3 trillion tax increase includes a $743 billion health-care reform tax, and an $843 billion cap-and-trade energy tax that would be passed on to every household and business. (The president endorsed this tax but inexplicably excluded its cost from his budget.) President Obama would also raise taxes by $968 billion on small businesses and upper-income families, and by $468 billion on corporations --- just as these businesses are struggling to create jobs.

These tax increases would push Washington's total tax bite to its highest sustained level in American history. And yet it still wouldn't keep up with all the new spending. The Social Security and Medicare costs of 78 million retiring baby boomers threaten to bury Washington in an avalanche of debt. President Obama's answer? To deepen the avalanche with trillions of dollars in additional health care, education and energy spending.

Overall, federal spending -- which had been $24,000 per-household before the recession -- would top $36,000 per-household by 2020 (adjusted for inflation).

Which leads to the debt problem. Because spending is rising even faster than the president can raise taxes, the national debt is set to double over the next decade. From the American Revolution all the way through 2008, Washington ran up $5.8 trillion in publicly-held debt. This debt jumped to $7.5 trillion last year, and -- according to page 146 of the president's own budget -- would reach an astonishing $18.6 trillion by 2020.

The economic consequences of this debt are quite painful. By 2020, more than one-third of all income taxes would be needed just to pay the interest on this debt. That's nearly $1 trillion in annual tax dollars that won't educate a single child, fund a single American troop, or provide retirement security to a single senior citizen. It may also mean steeply higher interest rates for anyone seeking a mortgage loan, car loan, student loan or business loan.

This debt also brings profound moral consequences. Washington is preparing to undertake the greatest intergenerational transfer of debt in American history. This debt burden will saddle younger generations, not old enough to vote when most of these policies were enacted, with staggering tax increases, slower economic growth, and lower incomes.

President Obama has proposed a three-year freeze on some discretionary spending. Clearly this is better than another budget hike. But he doesn't mention that this freeze affects only one-eighth of all spending -- a group of programs whose budget jumped 19 percent in the past two years, and is still sitting on more than $200 billion in unspent stimulus dollars.

President Obama also hypes his $23 billion in proposed spending cuts and terminations (less than 1 percent of all spending). He doesn't mention that last year, every dollar saved from his spending cuts went into new government spending. Not a dollar went toward deficit reduction. And this year he proposes more of the same.

Finally, President Obama blames much of the future deficits on the 2001 and 2003 "tax cuts for the rich," and war spending. However, page 164 of his budget shows that his proposed repeal of these tax policies would raise less than $70 billion annually. And page 173 shows war spending phasing down to $50 billion annually.

Yet his budget's deficits would still top $1 trillion by 2020. Obviously, those items are not driving the deficit. Instead, the long-term deficit is rising due to surging entitlement costs and interest on the debt.

Unfortunately, President Obama and Congress have once again shown that politicians use tax increases to expand government, not reduce the deficit. Before asking recession-weary Americans to further tighten our belts, it's time for President Obama and Congress to tighten their own.

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Brian M. Riedl Grover Hermann Fellow in Federal Budgetary Affairs
Thomas A. Roe Institute for Economic Policy Studies

First appeared in the Pioneer Press