The Obama Watch

Breaking Faith

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.

By 2.24.10

"I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes." That is what Barack Obama promised the American people when he was asking for our votes during his 2008 election campaign. Not just this one time, but over and over throughout the campaign. You could ask Joe the Plumber.

Truly, this pledge was the centerpiece of his 2008 election success. I remember during one Presidential debate, Obama hotly disputed McCain's charge that Obama would run up spending so much that he would inevitably bury voters with tax increases. Obama responded by reiterating the above no tax increase pledge, and insisted further that for those making less than $200,000 per year, "your taxes will go down," emphasizing the point with a downward sweeping motion of his arm.

But after only one year in office, in a shocking Business Week interview on February 9, President Obama cavalierly dismissed these core campaign pledges. In response to a question asking, "If your deficit commission comes back and says we would recommend raising taxes on households earning less than $250,000 a year, would you accept that as part of a larger deal?" President Obama said,

"I don't want to prejudge the commission because the whole point of it is to make sure that all ideas are on the table, and let's see what folks can come up with. What I want to do is to be completely agnostic in terms of solutions."

Looks to me like President Obama owes John McCain an apology. If Obama was being honest back during that 2008 debate, he would have responded to McCain's tax increase charge by saying what he said on February 9, that "I want to make sure that all ideas are on the table, and let's see what folks can come up with," and that he was "completely agnostic" regarding a tax increase on working people.

After all, it is not like America's overwhelming long-term deficit problem is a new surprise to Obama. He knew perfectly well back in 2008 what he also told Business Week on February 9: "[T]he fact of the matter is that we have a structural deficit that is in place that was there before the recession…And that is going to require some big, tough choices that, so far, the political system has been unable to deal with."

Included in that political system unable to deal with those necessary big, tough choices is President Obama, who greatly exacerbated the deficit problem with his nearly $1 trillion, failed "stimulus" package just a year ago, followed just a few weeks later by the $400 billion omnibus spending bill, followed by his budget providing for an 18% increase in total federal spending in just one year, and for a one-third increase in federal welfare spending over two years. After those big, tough choices, with the "stimulus" money mostly flowing in this election year to try to buy votes, President Obama is now "agnostic" on tax increases on working people. Isn't this exactly what John McCain said would happen?

And while Obama is issuing apologies, he should also apologize to Senator McCain for his less than honest mischaracterization of McCain's proposal to extend tax credits for the purchase of health insurance to everyone, which Obama indignantly denounced as involving unprecedented taxation of employee health insurance. Such taxation is exactly what President Obama has now proposed in his government health care takeover plan earlier this week, also in violation of his pledge of no tax increases on working people.

The Presidential Commission to Raise Your Taxes

"The whole point" of President Obama's Commission is precisely to obtain political cover to abandon his central 2008 campaign pledge not to raise taxes on working people. He can then say that it wasn't his idea. The "experts" on the Commission made him do it, right after he says the tax increase is actually really Bush's fault.

None of the rest of us should let him get away with that garbage. If President Obama endorses a Commission proposal to raise taxes on working people in violation of his campaign pledge, I will be persistently pestering conservative, free market, and Republican leaders to join me in calling on him to resign. It is just too much of an abuse of voters and our democracy for a candidate to run for President promising so centrally to cut, rather than increase, taxes on working people, sneering at anyone who suggests anything to the contrary, and then to lead a crusade to do just the opposite once elected. If President Obama believes what he said in that Business Week interview, then he should have to resign and run again on what he actually believes, to maintain the basic integrity of our democracy.

Obama further clarifies the tax increase intent behind the Commission in saying, as quoted by the New York Post on February 12, "The notion that somehow we can just cut our way out of this problem is not true." Translation: he has already decided to break his pledge with a wicked tax increase. What is likely coming is a proposal for a Value Added Tax (VAT) as is widespread in Europe, where the tax is incorporated in the price of everything you buy. Far Left House Speaker Nancy Pelosi has already endorsed that barnburner burden on working people. They know that between the Obama/Democrat budget and the health takeover bill they are already trying to squeeze more out of "the rich" than they can get.

The intent behind the Commission is further revealed by the Washington establishment figures President Obama appointed to head it, former Clinton White House insider Erskine Bowles, and retired Senator Alan Simpson, author of the failed 1986 immigration amnesty plan. Transparently, they will follow the shopworn establishment methodology for balancing the budget, which never works, and has no prayer of ever working.

That is for a convocation of wise, establishment, graybeards like the Commission to solemnly bargain over competing lists of spending cuts and tax increases, and come to some deal. The tax increases are then adopted permanently. But the spending cuts are never adopted, or if they are they are soon swept away in the next liberal budget.

Then the tax increases don't raise the revenue expected, because no one in establishment Washington can imagine that tax increases have negative incentive effects that reduce the expected revenue increases. So the deficit reappears, and continues until the voters can be fooled by the whole charade again. We have seen this over and over at the state level, as well as at the federal level.

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 a Senior Fellow for the Heartland Institute, and Senior Policy Advisor on Entitlement Reform and Budget Policy for the National Tax Limitation Committee. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General under President George H.W. Bush.