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Saturday, February 21, 2009

Obama's Budget Deficit Proposal: Ludicrous, Dangerous and Unrealistic

Fox News just spoke with a source that revealed the outlines of President Obama's plan to cut the budget deficit in the long term.

Barack Obama wants to cut the federal deficit in half by the end of his first term, mostly by scaling back Iraq war spending, raising taxes on the wealthiest and streamlining government, an administration official said Saturday as the president worked to finalize his first budget request.

Obama's proposal for the 2010 fiscal year that begins Oct. 1 projects that the estimated $1.3 trillion deficit he has inherited from former President Bush will be halved to $533 billion by 2013. That's a difference of 9.2 percent of the overall economy now vs. 3 percent in four years.

He's expected to outline some broad themes of his budget request Monday at a White House summit on fiscal policy and touch on it during his first speech to Congress on Tuesday evening. He is slated to officially send at least a summary of it to Congress on Thursday, barely a week after his $787 billion economic stimulus plan becoming law.

He has pledged to wind down the Iraq war by withdrawing most combat troops within 16 months of taking office. He also has said he would let the temporary Bush tax cuts expire in 2011 for people making more than $250,000 a year, effectively raising taxes on those people. And, he has vowed to scale back spending and improve government efficiency by eliminating programs that don't work.

Now, maybe in the world of President Obama 2+2=8, but that's not what it equals in reality. To say that ending the Iraq War, raising taxes on the wealthies Americans, and cutting "programs" that don't work will cut $500 billion from our budget eventually is to engage in fantasy, and dangerous, ludicrous, and unrealistic fantasy at that.

The Iraq War costs about $10 billion monthly or $120 billion yearly. That's with the current levels of troops at about 140,000. Tax cuts on the wealthiest would generate just less than $100 billion yearly, assuming they don't weaken the economy so much that it throws all projections out of whack. Furthermore, President Obama has already called for 17,000 troops increase to go to Afghanistan and its likely there will be more troops going there in the future.

A full troop withdrawal in sixteen months from Iraq is not only unrealistic but dangerous. It's likely that troop levels can be reduced dramatically in his first term, but there will likely need to be some residual force in Iraq for decades to insure that our gains are not reversed. Beyond this, the increased troop levels in Afghanistan won't be free. As such, it is unclear just how much we will save from our troop withdrawals in Iraq.

More dangerous still is President Obama's proposal to raise taxes on the wealthiest Americans. A sure fire way to prolong the recession, or to stunt any recovery, is to announce any sort of tax increase. While it may have a populist angle to raise taxes on the wealthiest, it is the wealthiest that primarily invest and create jobs. Most folks spend based on future expectations. As such, anyone facing a tax increase is not nearly as likely to take on any new "spending". Now, there are liberals that say that the wealthy wouldn't "spend" any tax increase anyway. Of course, this is where those liberals, and President Obama especially, fail to understand "spending". The wealthy don't merely buy stuff. The make investments in businesses, real estate, investments, and even just put extra money in the bank. All of these acts stimulate the economy. Facing a future tax increase, the wealthy are less likely to engage in any of this. All of this is contractionary. Watch for investment and small business expansion to contract even more as soon as this announcement spreads through the mainstream.

So, so far, we have at most a saving of $150 billion. The rest of it (almost $400 Billion), presumably, will come from the nebulous "eliminating programs that don't work." This is something that President Obama has been saying for over two years since the time when he was merely a candidate. He has still not once named even single program that doesn't work. Furthermore, government programs increase in spending, it is very difficult to reverse those programs. For instance, he has nearly doubled the budget of the Department of Education with the stimulus alone. Does anyone really believe that Department will suddenly go back to spending less now that he has given them all this money?The Department of Energy is receiving about $25 Billion for alternative energy and climate change research. HUD is receiving an extra $10 billion for various projects. Does anyone really believe that this money will suddenly stop flowing to each of these departments when it comes time for a new budget? So, while President promises to "eliminate programs that don't work", his stimulus will certainly also create permanent new base level spending in a plethora of new spending. So, the idea that he will cut the budget by "eliminating programs that don't work" is a fantasy that the President will create until an actual budget is proposed.

So, here is what we have. We may have a misguided attempt to wrap up a war too quickly and reverse gains. Either that, or more likely, we will have mild troop reductions that will be nearly offset, cost wise, by troop increases in another theater. Second, we have tax increases that will likely go into effect either while we are still in a recession or just experiencing a recovery. As such, we would likely be repeating the same mistakes of the Depression when Hoover similarly raised taxes only on the wealthiest Americans and perpetuated the Depression. Finally, we have vague allusions to cutting programs that don't work, while we will certainly have real new baseline spending amounts on all sorts of other programs created by the stimulus. In other words, this proposal to attack the deficit is nothing but ludicrous, dangerous and unrealistic.


Anonymous said...

You say tax cuts in the 7th paragraph.

I think you mean tax increase......

Anonymous said...

It should be fairly obvious where Obama plans to cut spending that I'm surprised you didn't mention it yourself. Its obvious the Democrats want to make shrinking DoD a priority.

Anonymous said...

He gets $1.3 trillion deficit - adds to it another $1 tillion and expects to cut all of that to half a trillion in four years just by raising taxes on people who pay more than they should already. Think about this - I make $100K per year and pay 30% or $30,000 in taxes (that is only Fed) Pay more like $65,000 or 65% when all other taxes are added in. Now some one who makes $300,000 and pays the same percentage I do - but actually pay more in actual dollars - $90,000. Just because they make more - doesn't mean they should pay more - do they get more for it.

Whats next - go to the grocery store and be charged based on what you make? Get the cash registrar and have to show a pay stub so they now how much to charge you? Buy a soda - and since you make over $250K a year, that soda will cost you $5 - everyone else $1 dollar.

Glen said...

If anonymous makes $100K a year and pays $30K in taxes s/he needs to get an accountant. Whoever makes up this stuff should at least get their facts right--the income tax is graduated (not as much as it should be). Say as with most state income taxes. No one pays the high rate on all their income.
Anyway, if you want a war you should be willing to pay for it, not borrow the cost from the future. Since the war is clearly for the rich they should pay the most.

mike volpe said...

That is just simply inaccurate. Taxes are not paid at 15% on the first whatever, 20% on the next part, etc. That's just not how it works.

Glen said...

Mike is simply WRONG. Taxes are paid in increasing percentages depending on the increase in income according to income brackets. The first income one gets is not subject to any income tax. The next may be subject to 15%, higher amounts may be at 35% but you DO NOT pay the higher amount on any income except that in the higher bracket. This is what is called the 'marginal rate.' It is this sort of misinformation or ignorance that allows the rich to get away with low taxes on their millions while ordinary people pay at least a fair share. In fact, most million $ income Wall Street types take their income and call it capital gains so they pay only 15% at most on it.
A graduated tax that is actually fairly applied is the most fair of all but people with money and contacts have eroded that fairness away.

mike volpe said...

That's funny. I am in sales, all commissions. Yet, every dollar from day one is taxed even though no one knows how much money I will make. That's just simply not accurate. The tax code is complicated enough. It isn't split into all of these sub categories for each part of each person's income.

Glen said...

Mike, I can't believe the fiscal illiteracy that your comments represent. When you calculate your taxes at the end of the year you can divide the gross income (after various deductions which subsidize certain life-styles, i.e. your mortgage interest expense for example) and divide that by the taxes paid. It will flat out not be the highest rate.
Your simplistic hostility to taxes has destroyed your reason.
We all have to pay for the work of the nation. Some things we don't want and some things we do want. You probably only want to pay for what you want but you certainly would not let me do the same.

mike volpe said...

Really, it won't. Well, all I can tell you is that after having someone like you say something like this I asked a few accountants and they told me you were wrong. Let's forget that for a minute. I will just show you in raw numbers that you are wrong.

Let's suppose someone makes 35k yearly. Here are the current tax brackets, 0, 10, 15, 25, and 33%.

I think anything up to 15k has zero taxes and then 15-25k is taxed at 10% and so on.

If what you are saying is correct, then the first 15k is zero, then the next 10 is at 10%, and the remaining is at 15%. Now, my numbers maybe slightly off because I am not sure if my dollar amounts are right, but let's look at it.

That means that the worker would pay $1000 between 15-25k and then $1500 between 25-35k. That means that person would pay $2500 in federal taxes on income of $35k. Do you really think that someone making $25k only pays about 6.5% in total federal income taxes. Do you really think it is so little.

By your assumptions, even someone making 50k would only pay ten percent or so in total federal income taxes. Are you sure you are correct because if you think the government would take so little you clearly don't know our government?

Anonymous said...

Obviously when one does not have enough information and knowledge, there will always be a negative view over any new proposition, especially is it is a new administration plan to help this country. In this case, I believe the author of this article is simply too negative and judgmental, while he does not have all pieces of the proposal and the President's plan and how they will play in the future. By the way, has anyone tried to check what the tax rate in some of the most developed countries is, say Norway, Switzerland, other countries in Europe. You will be surprised how much money people pay in taxes so everybody can afford healthcare, so everybody can use good roads and share into the things that noone seems to want to pay. As far as the rich people,the conservative consumer behavior is also quite misunderstood. Rich people will always invest in winning propositions. In a crisis situation rich are the ones that are more resilient, so I would not be concerned much about their behavior. Many of them behave in a very unpredictable manner in regard to increasing their wealth.Their decisions are based on risk aversion. The consumer demand contracts much more in the middle and lower income bracket. This is simple economics. The rich can be conservative and frugal, but this is not a function of how much taxes they pay. They will always have top quality healthcare at their disposal, their children will always go to the top league schools, their businesses will always thrive, and they will keep on fighting battles that are not theirs. Why should entire nation pay for the schemes of those that want to get richer on the account of others? Finally, President Obama mentioned that he, and, (notice this) his team, have already identified programs that don't work, the funding for which can be potentially cut. He mentioned that the amount of those is approximately $2 trillion. But this is not final, nothing is yet final, thus it is simply unfair to be so bias, unnecessarily critical, judmental and negative and diminish the political will of the new administration to deal with such a huge mess they inherited. Anybody that feels strongly as an opponent could perhaps offer their services and brains to the new administration and help to fix the mess. It is easy to critisize from the sidelines, but would you take the grand responsibility to work on those issues?
Patience is virtue.

mike volpe said...

I've checked out the tax rates in Europe and they are significantly more than they are in the U.S. More than that, in Europe, there all sorts of taxes in Europe that aren't in the U.S. For instance, in France there is a renter's tax.

The President just announced that he will spend $4 trillion this year alone.

Now, he is claiming that the budget deficit will get cut to $500 billion. Please.

This isn't about any new ideas. President Obama's ideas are traditional tax and spend ideas. There is nothing different from him and most any classic liberal. He also makes promises of one day being fiscally disciplined like all politicians, and none of them ever do it.

Raising taxes during a recession, depression or even at the beginning of a recovery is very damaging. That is also not a new idea. That, I learned in my first Econ class.