The American Spectator : Breaking Faith

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Breaking Faith

By Peter Ferrara on 2.24.10 @ 6:07AM

President Obama's tax-raising plans have passed the point of no return. So much for his pledge not to raise taxes on working people.

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How to Balance the Budget

There is only one tried and true way to balance the budget, which has worked every time it has been tried, including the last time the federal budget was balanced in the 1990s. It is a simple two step process. One, cut tax rates to improve incentives for savings, investment, job creation, business creation, business expansion, entrepreneurship and economic growth, to get the economy booming. You can't balance the budget by constantly chasing lower than expected revenues. With the economy booming, revenue surges consistently. Step two, slow the growth of spending, and let revenues surge past it.

When the Republicans took control of Congress in 1995, they were greeted by President Clinton's 1995 budget proposals that still projected Federal deficits of $200 billion per year indefinitely into the future. Those deficits remained despite a record tax increase in 1993 that contributed greatly to the Republican victories in 1994, and the infamous Bush tax increase/supposed spending cut deal in 1990 that led to his defeat in 1992.

The new Republican Congress cut the capital gains tax rate by 40%, and reduced other tax burdens on capital investment. They also cut total federal discretionary spending, as well as the subcategory of non-defense discretionary spending, with both actually declining from 1995 to 1996 in nominal dollars. In constant dollars, adjusted for inflation, the decline was 5.4%. By 2000, total Federal discretionary spending was still about the same as it was in 1995 in constant dollars. As a percent of GDP, Federal discretionary spending was slashed by 17.5% in just 4 years, from 1995 to 1999. Total Federal spending relative to GDP declined from 1995 to 2000 by 12.5%, a reduction in the Federal government relative to the economy of about one-eighth in 5 years. The House passed a budget in 1995 that actually cut federal spending by a trillion dollars over 10 years, and that was when a trillion dollars was real money.

As a result, $200 billion annual federal deficits, which had prevailed for over 15 years, were transformed into surpluses by 1998, which peaked at $236 billion by 2000.

The Plan to Balance the Budget

To correct the budget mess President Obama and Congressional Democrats have made, we should start with tax reform that will maximize long-term economic growth. The current corporate tax rate is the second highest in the industrialized world, which leaves American companies uncompetitive in the global marketplace. The EU has slashed their corporate tax rate over the last decade from an average of 38% to 24%. Germany and Canada are slated to go below 20%. Our emerging competitors India, China, and Brazil have lower business taxes as well.

Cut the federal corporate tax rate from 35% to 15%. Adopt an optional flat tax for individuals of 15% as well. Close both individual and corporate loopholes in return, including credits, special deductions, and exemptions. Keep the capital gains and dividends tax rates also at 15%, though a new study from Steve Entin at IRET argues persuasively that the revenue maximizing rate for cap gains is 10%. Abolish the counterproductive death tax and the unfair Alternative Minimum Tax, as multiple taxation of capital is never a good idea. We should take this as the revenue base we have to work with, and match long term spending to it.

We can save a trillion dollars just by terminating unspent stimulus funding, and ending, rather than re-funding, TARP bailouts. For everything else, other than Social Security, Medicare and Medicaid, we should follow the brilliant suggestion of returning to the spending levels of 2007. That was just 3 years ago, and America was doing fine with federal spending at those levels. Apply that to national defense as well; 2007 was the height of the Iraq surge.

The beauty of this is that it makes so clear the real cause of currently exploding deficits: the runaway spending since 2007 by the Democrat Congress and the Obama Administration. The deficit for the last budget adopted by the Republican Congress was $162 billion in fiscal 2007. The deficit for this year is $1.6 trillion. This is why Rep. Jeb Hensarling was essentially correct to say to President Obama that "the annual deficits under the Republicans became the monthly deficits under the Democrats."

For the entitlements, what we need is fundamental structural reforms, not trying to just "cut our way out of this problem." Start by allowing young workers the freedom to choose to save a portion of their Social Security payroll taxes in their own personal accounts, with the accounts taking responsibility for an equivalent proportion of future Social Security benefits. Because long run market investment returns are so much higher than what Social Security even promises let alone what it can pay, workers would actually get higher rather than lower benefits through this option. Consequently, we can back up the accounts with a federal safety net guarantee that workers with the accounts would get at least as much as promised by Social Security.

Expand the accounts over time until they finance all the benefits currently financed by the payroll tax, replacing survivors benefits with life insurance, disability benefits with disability insurance, and even part of Medicare with health insurance. The payroll tax can consequently be phased out over time as well. These personal accounts dramatically reduce federal spending over the long run by shifting the payment of all these benefits from the public sector to the private sector. There would consequently be no need to cut these promised benefits. They are being replaced over time with better benefits from the private sector.

The general revenues now financing so much of Medicare can be used to provide means-tested vouchers for health insurance for seniors who could not otherwise afford such coverage, with such general revenue expenditures limited to grow no faster than the rate of economic growth. Medicare Advantage should be updated and expanded so that all seniors would be free to choose private coverage for Medicare, including Health Savings Accounts (HSAs).

We should also expand the enormously successful 1996 welfare reforms to the other 85 federal means tested welfare programs, sending the federal financing for those programs back to the states in the form of finite block grants that do not vary by matching state spending. This includes Medicaid, food stamps, and housing programs. The states would then redesign their entire welfare systems based on work by the able bodied, with states that succeeded in reducing costs rewarded by keeping the savings, and states that ran up costs paying for that themselves. Medicaid in particular could be reformed by providing vouchers for the purchase of private insurance for the poor, including HSAs, allowing them to escape the poor health care provided through the Medicaid ghetto, and enjoy the same health care as the middle class. The 1996 reforms succeeded in reducing the rolls of the old AFDC program by nearly 60% nationwide, portending enormous potential savings from expanding these reforms to the entire welfare system.

Other fundamental reforms can and should be adopted as well. We should bring back the Freedom to Farm policies of the 1990s, and phase out agricultural subsidies entirely. We should extend that to eliminating all other corporate welfare as well, exactly contrary to President Obama's crony capitalism.

House Republican budget chief Paul Ryan has already shown how similar reforms, including the tax reforms, would permanently balance the federal budget over the long run, as officially scored by CBO, with federal taxes and spending at their postwar average of 18.6% of GDP. This includes financing the transition to personal accounts entirely through the savings from the entitlement and spending reforms.

But don't expect President Obama's Washington Establishment Commission to come up with anything like this. They are primed instead to demand more taxes from working people through a VAT, so America can follow Europe into socialist oblivion. Republicans would best respond to Obama's Commission by appointing their own Commission headed by Paul Ryan. Include as well Newt Gingrich, Jeb Hensarling, Republican Governors, maybe Sarah Palin, and whatever reasonable Democrats can be found, which don't have to be elected Democrats.

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About the Author

Peter Ferrara is Senior Fellow at the Carleson Center for Public Policy, Director of Entitlement and Budget Policy for the Heartland Institute, and General Counsel of the American Civil Rights Union. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of America’s Ticking Bankruptcy Bomb, now available from HarperCollins.

Letter to the Editor View all comments (37) | Leave a comment

mstahl| 2.24.10 @ 7:14AM

If you make more than 100k your taxes go up every year as the cap on SS wages goes up. That was true before Obie made his pledge. So, he was lying right from the get go. Most of Mr. Ferrara's ideas make sense but those in power have a breathtaking disdain for the idea of fiscal responsibility. BTW the Clinton administration did not run surpluses. This is one shibboleth that must be countered. They counted the SS revenue as general revenues when doing deficit calculations. I get a little tired of hearing people say "we had a surplus during the Clinton years". It is all on the OMB website, "you can look it up".

Ferrara| 2.25.10 @ 2:18AM

We have high expectations for Obama !

I do not think he would be smarter than any other term of the President

http://www.udtek.com/lcd-charger-c-4.html

Bram| 2.24.10 @ 7:37AM

He always intended to let the Bush tax cuts expire - so he was lying all along.

I was openly laughing in the face of co-workers who believed Obama's tax lies.

Jim O'Brien| 2.24.10 @ 7:56AM

Send more donations to Joe Wilson (R-SC). He called Obama a liar on the floor of Congress.

The way to get the economy moving again is to eliminate the federal income tax system and the IRS. Legislation has been introduced in both the House and the Senate to do just that. It's called the Fair Tax (www.fairtax.org). It would mean no corporate or personal income tax, no capital gains tax, no estate tax, no taxes withheld from paychecks, no taxes on dividends or interest, no IRA or Roth issues, and no need for the country to spend some $300 billion a year just to comply with more than 50,000 pages of IRS regulations. The Fair Tax is a sales tax which would be collected via existing state mechanisms. It is a tax on consumption, in contrast to the existing system, which taxes productivity. Anyone who wants to buy things must pay it, even the millions of illegal immigrants living here.

On the Fair Tax website, you can find out if your congressman supports it, or not. It would result in unprecedented economic growth, making the U.S. a magnet for capital.

Copyleft| 2.24.10 @ 8:15AM

The Unfair Tax is, of course, a scam. It relies on the well-known ignorance of the American public when it comes to economic matters, and appeals to their craving for "easy answers" that sound good until you explore their actual consequences.

Make no mistake, the rich would be DELIGHTED to see the Unfair Tax put into place--it would do an excellent job of further redistributing wealth away from the working class and into the pockets of the wealthy.

But its primary value is as a propaganda tool, urging the ignorant base to vote against their own interests and in favor of corporate oligarchs. For the GOP, that's business as usual.

JP| 2.24.10 @ 8:34AM

"Make no mistake, the rich would be DELIGHTED to see the Unfair Tax put into place--it would do an excellent job of further redistributing wealth away from the working class and into the pockets of the wealthy>"

CopyLeft,
About 70% of those earning $65,000 or less pay no income tax. Anyone earning $300,000 or more pay over 40% in taxes and fees to local, state and federal governments. People earning more than a million a year pay almost half of thier earnings to various forms of government. I remember Michael Jordan saying in 1996 that his Medicare withholdings alone were over $3 million (taken from his annual earnings of $35 million). To say that wealth is being redistributed from the "working poor" to the wealthy is asinine.

Tom| 2.24.10 @ 8:50AM

Jordan lied. Or you misremembered. Medicaire tax rates for employees is 1.45%. I do not know what it was in 96 but I would wager it was not 8.6%.

Still an insane amount of money though...

Tim| 2.24.10 @ 9:20AM

Copy, really, the Democrats and the Republicans couldn't drop trou and jump in the bailout bed fast enough to save their big, stupid, bankrupt banker friends. It is emphatically not a left-right issue. George Bush, John McCain, Barrack Obama all, ALL lined up to sign government checks for Goldman Sachs and friends.

Copyleft| 2.24.10 @ 9:54AM

Now, THAT I'll agree with. Every critter in Congress is beholden to the special-interest money first and foremost, party and country be damned.

Ryan| 2.24.10 @ 1:02PM

How would the wealthy get around paying the Fairtax if it was implemented?

Copyleft| 2.24.10 @ 1:04PM

I never said they would. I said they would benefit from it disproportionately, through the elimination of non-consumption taxes that enable us to have a fair and progressive tax structure.

Ryan| 2.24.10 @ 3:06PM

So what? So what if they benefit disproportionately - does that necessarily make it unjust? If they earn more, but pay taxes, and the government is funded properly, what does it matter?

MikeBee| 2.24.10 @ 4:07PM

Those who pay the bulk of taxes now SHOULD receive a break, if taxes are lowered in any way. Today, the wealthy pay far more in taxes than do the working class. What really needs to be done today is the complete elimination of corporate income taxation, for an extended period. This, combined with the weak dollar today, would create massive foreign investment in the U.S., strengthening our economy, and creating jobs. The foreign investment and jobs created would, in turn, increase revenues for the federal government.

Jeff Perren| 2.26.10 @ 4:06PM

"non-consumption taxes that enable us to have a fair and progressive tax structure. "

This is the root of your error - and an indication of why your entire political philosophy is wrong. There is nothing fair about progressive taxation; conversely, there is nothing unfair about allowing an individual to keep what he has earned. Nor is it moral to ask the government - particularly the Federal government - to act as your proxy to steal from Peter to give to Paul.

To address a relatively minor reasoning error, a flat tax still takes proportionately according to income. Those who make more still pay more, when loopholes are closed.

That aside, the only fair income tax is NO income tax - for anyone. Cut spending enough to make that possible and 90% of our domestic troubles will disappear within five years.
Of course, that would leave a lot of social engineers with little to do. Well, there's always a downside to every plan.

Bostonian| 2.24.10 @ 8:28AM

Mr. Ferrara is correct about Obama's dishonesty and the need to cut spending, but he is unrealistic about broad-based tax cuts raising revenue. The Laffer curve does exist, but at current tax rates, reducing tax rates DOES reduce revenue, although by only about half as a "static" analysis would predict. (Source: "The 'Laffer Curve' Renamed", by Alan Reynolds:
http://www.cato.org/pub_display.php?pub_id=6432 )

Darin| 2.24.10 @ 8:36AM

Obama lied.
My income died.

Melvin| 2.24.10 @ 8:44AM

For a Constitutional lawyer/politician, lying is more of a tool than than a attachment to the politicians conscience.
If it takes lying to the American idiot public then so be it, because they are not smart enough to figure out that I am lying to them. And if they did who cares they have short attention spans anyway.
Another aspect to this is lying is so pervasive and acceptable in the new American mentality that it almost a contest to see who is the better liar.
A freshman college student was asked during one interview, "Do you feel that cheating on college exams is perfectly acceptable?" The student replied, "Absolutely, what ever it takes to get that degree, if that means cheating, then it's OK."
You see, the student has already fabricated himself and out because as long as cheating, lying, and or stealing is used to get his degree then it is perfectly acceptable.
This is technique is what Obama is using, he'll lie is rear-end off in order to advance his agenda, because he as the student did, fabricated himself an out. but if some-else lies, cheats or steals preferably from the opposing political party then that is bad.
Bill Clinton got on National TV and lied to us straightaway and America some much didn't raise an eyebrow.

Richard Baker| 2.24.10 @ 9:25AM

And we should be surprised when a man whose friends were all Socialists/Marxists/Communists lies? Lenin said that "treaties are like pie crusts, made to be broken." When the Patron Saint ridicules honesty and commitments should we be surprised when the present occupant of 1600 Pennsylvania does the same?

davelnaf| 2.24.10 @ 9:26AM

Stop complaining about the Chosen One's methods. He knows what he is doing even if the rest of us don't.

Al Adab| 2.24.10 @ 3:02PM

Dave,
Of course we should all shut up and follow the lead of our betters. After all the idiots who thought up this self government idea were just a bunch of old guys.

Just a question though, who decides which of our "betters" we follow?

Richard Baker| 2.24.10 @ 9:35AM

davelnaf:
Ah, but we do know what he's doing. Sic Semper Tyrannis.

Tony in Central PA| 2.24.10 @ 10:14AM

Obama has a consistently rigid, ideological M.O. : tell everybody whatever he thinks they want to hear when convenient, then in matters of policy, further empower, enlarge and centralize the government. History will show that this particular President, House and Senate to have been the worst combination possible for our nation's fiscal challenges.
Republicans have been derided as the " party of bad ideas " and the Democrats as " the party of bad ideas ". I would now amend the Democrat description to " the party of one bad idea ".

Tony in Central PA| 2.24.10 @ 10:17AM

I flubbed, I meant to write the GOP was derided as " the party of no ideas ".

Mattled| 2.24.10 @ 10:33AM

Tony---when you wrote about Obama's M.O., I for a moment thought you were writing about Moochelle.

How many people thought her "Let's Move" program was them leaving the White House? (Cue The Jefferson's music)

Tony in Central PA| 2.24.10 @ 10:53AM

" Let's Move " ? By all means. Retiring Michelle alone should put a sizable dent in the deficit.

coal carrier| 2.24.10 @ 10:51AM

The progressives lie to our faces. Obama is no different. Then they turn around and hire high priced lawyers and CPA’s to hide their money from the socialist government that they promote, defined and perpetuate. Including Striesand, De Niro, Clooney, Biden, Pelosey and Soros. Just to name a few.

Oldefarte| 2.24.10 @ 10:58AM

Peter, great ideas MOST, but I'll offer alternatives. Due to the current budget deficit and national debt, forgo tax cuts for now, and instead substantially CUT EXPENSES of the government. Foreign aid has no useful purpose, and only ends up in the pocket of some dictator on his way to a Swiss bank. Farm aid to most large wealthy farmers should be eliminated, as the crop prices should sufficiently provide their income. The space program should be reduced to UNMANNED flights only [for strictly scientific purposes]. Welfare should be reduced and redesigned into workfare [recipients should be required to work for local governments at various menial labor (ie street cleaning, farm labor, governmental building cleaning,etc)]. Military purchases should not be for exorbatant equipment/hardware that is wasteful [ie,supersonic jets when our enemy is Muslim extremists with roadside bombs and rifles];etc. Medicare should not be excluded based on 'means testing'-----recipients have PAID FOR this Medicare through their lifelong SS taxes paid. Medicare should be remedied through tort reform, interstate insurance purchases, medical industries cost reductions,etc [not means testing]. Medicaid should be entirely eliminated, and instead governmental hospitals [staffed by medical interns and government paid physicians]should be established throughout the country. Privatization of SS accounts would be a mistake, as some people simply are not educationally qualified to direct/invest their monies. Instead SS's salary limit should be eliminated, thereby substantially increasing its revenues. Workers should be given the option of opting out of SS at the beginning of their work career, and at retirement, be excluded from SS coverage. Otherwise, I agree with your excellent thesis!!!!

Ed| 2.24.10 @ 12:37PM

In the original Star Trek series, Captain Kirk would befuddle a sentient supercomputer system with something like the following syllogism:

"All Obamas are liars. I am Obama."

And the poor computer would devolve into a gibbering, catatonic state.

(A tip of the hat to Jonah Goldberg)

Larry in Iowa| 2.24.10 @ 12:37PM

Sounds like a "Read My Lips" situation to me. The question is, will Republicans do to Obama what Democrats did to GHW Bush?

Al Adab| 2.24.10 @ 1:12PM

This type of dissembling is oh so typical of the Domocrat/Left. When they refer to taxes the "mean" only income or direct taxes. To them Fees, costs. regulatory imposts and the like are not taxes. Yet, to small business the costs imposed are becoming prohibitive. Should "health care" imposts and requirements emerge, the overall cost to business will be enough to drive them into extinction. Many doctors will quit and many small businesses will disapear. So much for economic recovery.

WRJonas| 2.24.10 @ 4:52PM

I agree whole heartedly with Larry in Iowa. For all of the Republican Glenn Beck types out there gargling with the No Difference Between the Parties mouthwash, consider the consequences of George Bush' "Read my lips" remark and Obamas " no taxes on those earning under $250k "
The lying lefty gets a pass from the MSM and GWB gets clobbered instantly the moment he signed the legislation. In fact , those who were urging him to accept the bill began attacking him the day after he okayed it. The left has only one mode ,,Attack Republicans .

Bill| 2.24.10 @ 7:40PM

Obama Sucks!

Radioman777| 2.25.10 @ 1:22AM

Anybody stupid enough to believe that he actually intended to keep this, or any other, campaign promise needs to check into the nearest mental hospital to have their delusional selves cured. He never intended to keep any promise he made while campaigning, or at any other time. Mr. Obama is, to put it bluntly, a LIAR. He's always been a liar and always will be. I believe he's pathologically incapable of telling the truth about anything.

Doubt me? Just how much do you actually know about him based on any information he's provided?

Jeffrey| 2.25.10 @ 2:02AM

Obama; born to a liar, educated by a liar, pastored by a liar, friends with liars, married to a liar and the liar just can't stop lying because; he is a liar.

Dein| 2.25.10 @ 7:32PM

Joe Wilson would need treatment for hoarseness if he had attended THE GREAT SUMMIT

Jack Kinch(1uncle)| 2.28.10 @ 4:05PM

Before No Lie Nobama is through, a lot more people will want the government to do something. SAD.

Orphe D| 3.1.10 @ 9:40AM

Would you care to view the video and comment on your blog? I am very interested in what you have to say. Your opinion matters! Thank you.
http://www.freedomandprosperit.....e1-3.shtml