Political Hay

Down With Obamunism

The opportunity is now there to downsize government -- and for starters that means rejecting any talk of a Deficit Commission.

By 1.13.10

Senator Judd Gregg (R-NH) is retiring from Congress this year. Congressman Frank Wolf (R-VA) should do so as well. The two are sponsoring a bill with Senator Kent Conrad (D-ND) and that "Blue Dog" con artist Congressman Jim Cooper (D-TN) for a Deficit Commission. This is the worst legislation sponsored by any Republican in this Congress, as it would provide cover for the largest tax increase in world history by far, and would ratify rather than oppose the Obama explosion in Big Government.

That is why indications are that President Obama will endorse this Deficit Commission concept in his State of the Union Address this year, after exploding the federal government to peacetime records. As the Wall Street Journal explained it on December 29,

After signing a $787 billion economic stimulus and embracing two annual blowout budgets that will double the national debt over 10 years even before ObamaCare, President Obama is poised to pivot [this] election year and denounce the horrors of deficit spending. So the White House is now floating a bipartisan commission to reduce federal borrowing, and much of the political class is all for it.

The Journal explained just how reckless Obama's spending has been: "From 2001 to 2008, under President Bush, federal…discretionary spending grew by 54%. Mr. Obama's policies have expanded these agency budgets by another 57% over just two years." Obama has also increased federal welfare spending by one-third over the first two years, with total government welfare spending now slated at $10.3 trillion over 10 years.

Under the Gregg-Wolf free market murder bill, 16 Washington experts would be appointed to a Commission with a mandate to look at everything from entitlements to taxes, and propose specific reforms to balance the budget. Congress would then vote up or down on the entire package without amendments, on an expedited basis.

From the early 1950s, after federal spending settled down following World War II, until last year under President Obama's neo-socialist revolution, federal spending was stable during those 50 plus years at around 20% of GDP. Today, after one year, the federal government is 40% larger at about 28% of GDP, a national tragedy in terms of lost economic freedom. But federal projections show that by 2040 federal spending will soar to close to 40% of GDP, due primarily to the exploding entitlement programs Social Security, Medicare and Medicaid. Dumping Obama's national health care program on top will just make the situation much worse.

Add in state and local government spending, and total government spending will be well over 50% of GDP. Counting the Obama spending increases and the negative effects on the economy from all this Overwhelming Government, total government spending will grow to over 60% of GDP.

If anything even close to this happens, America will be over. We will be socialist Sweden instead, which even Sweden is leaving behind now. Traditional American prosperity will be gone. Forget about the American Dream. We, as a nation, would no longer be worthy of that. Under the new system where we give most of what we earn to government bureaucrats and they tell us what we can have and how to live, the whole notion of economic freedom and prosperity will have been eradicated.

A Deficit Commission with taxes on the table is not going to solve this. Just what kind of a deal can we possibly expect from such a Commission of Washington experts, especially with a majority appointed by ultraleft President Obama and current congressional leaders? With federal spending currently slated to soar from 20% of GDP to close to 40% at least, the best deal we could possibly hope for would be for federal taxes and spending at 30% to 35% of GDP. That would mean a massive increase in taxes in return for a massive increase in government.

As The Wall Street Journal explains:

We only hope Republicans aren't foolish enough to fall down this trap door, though some are already tempted. A budget deficit commission is nothing more than a time tested ploy to get Republicans to raise taxes. In the 2009 version, Republicans are being teed up to hold hands with Democrats and agree to become the tax collectors for Obamanomics."

In other words, this Deficit Commission is very bad strategy for Republicans and conservatives. The Journal reveals the tax goal liberals hope to snooker Republicans into supporting: "Republicans would agree to an increase in the top income tax rate to as high as 49% and in addition to a new energy tax, a stock transaction tax, or value-added tax. The Indians got a better deal for selling Manhattan."

Republicans who are tempted by this snare need to wake up and smell this coffee: you will be challenged by a third party that would not mind dividing the vote and replacing you with a Democrat they can defeat later. Conservatives and libertarians who believe in free market prosperity will have no other political choice.

The 15 Percent Solution

A far better alternative has been offered by Rep. Patrick McHenry (R-NC), who has proposed a Commission dealing only with spending reforms, with tax increases off the table. Conservatives, libertarians, free market advocates, Republicans and the Tea Party movement should work precisely for addressing runaway spending, deficits, and debt by reducing spending, deficits, and debt. Taxes are not part of the solution. They are part of the problem, providing the financing for permanently higher spending. Our goal, in fact, should be to reduce federal spending over time below the long term 20% baseline, down to 15% of GDP, which would reflect our belief in smaller government, and leave us with long-term budget balance.

We should approach balancing the federal budget over the long run first by considering what our taxes should be, consistent with long-term economic growth. We should then determine what we can finance with that revenue, not visa versa.

Fundamental tax reform should include the optional 15% flat income tax, with generous personal exemptions of $12,000 per person. A family of four would then pay no income taxes on the first $48,000 in income each year, with no income tax burden on the working poor as a result. Virtually all other deductions and credits would be abolished for those that chose this option, allowing income taxes to be filed on a postcard. (Note: No $5,000 per child tax credit or other child credit under the optional flat tax. This plan is pro-family with these generous exemptions, and the focus needs to be on low rates to promote economic growth, not biasing the tax code to favor particular constituencies.) Taxpayers who want a deduction or credit under the current system could still file under that system instead, though no more refundable tax credits where the IRS sends out checks to people paying no income taxes.

The current federal corporate income tax rate of 35% should be reduced to 15% as well, which would restore international competitiveness to American business and industry. In recent years, the average corporate tax rate in the European Union has been cut from 38% to 24%. Germany and Canada are phasing in corporate tax rates of 19%. Corporate tax rates in India and China are in this range as well. The American rate counting state corporate income taxes would be close to 20%. Ireland adopted a corporate rate of 12.5% 20 years ago, and per capita GDP in this long-time poor country soared from the second lowest in the EU to the second highest. Our own Treasury Department estimates that Ireland raises more corporate tax revenue as a percentage of GDP with this lower rate than America does with its rate three times higher.

The capital gains tax, taxes on dividends, and the death tax should all be abolished, as these levies involve multiple taxation of income that is already taxed by the above individual or corporate income taxes. (A 15% cap gains rate, however, would generate soaring revenues in the booming economy that would result from all these reforms.) The payroll tax would be phased out over several decades, replaced by the personal accounts discussed below. State income taxes should be phased out completely as well, as in the nine states that do perfectly well today with no income tax.

Spending Relief

The New Revolution should prepare now to slash the runaway spending adopted by the Obamunistas. Any unspent stimulus funding should be terminated, along with TARP and any remaining corporate bailout authority. Replace "Too Big to Fail" with new corporate bankruptcy laws providing for rapid dissolution of failing firms that are not coming back. Applying that to some big firms would greatly improve the economy by eliminating "moral hazard."

Terminate all corporate welfare, including all the crony capitalism largesse for new "green" technologies and energy. We can and should remove all regulatory barriers to alternative energy. But it then needs to survive on its own in the marketplace, rather than saddling the country with permanently higher energy costs.

This means that all farm aid needs to be eliminated as well. Bring back "Freedom to Farm" from the 1990s that began phasing out that assistance in return for complete freedom for farmers in running their operations. Abolishing capital gains taxes and death taxes would be a good net trade off for the family farm.

All spending by the Small Business Administration would end as well, though the agency could continue at a greatly reduced size as an advocate for small business within the government. Terminate federal subsidies for National Public Radio and public television, with complete freedom for all these stations to choose what to broadcast. Ditto that for the Legal Services Corporation and all of its subsidies for left-wing legal outfits. Privatize Amtrak, leaving it with complete freedom to choose its own routes. Ditto that for the Export-Import Bank and the Overseas Private Investment Corporation (OPEC). Privatize the Postal Service, with stock in the new private corporation subject to free market competition distributed to its employees for free.

Suspend all Foreign Aid, except where it is an adjunct to national defense policy, until the federal budget is balanced. Similarly, freeze federal hiring as well until budget balance is achieved. Major reductions in federal spending would result from reducing federal employment and all of its costs. Reward federal managers with a percent of the savings they achieve in operations under their authority. Let them earn big bucks in doing so. Sell off surplus federal lands that are not part of national parks or historic preservation.

Freeze all federal funding as well for mass transit until the budget is balanced, focusing all gas tax revenues on repairing roads and bridges until our existing infrastructure is restored. Similarly freeze all federal funding for new housing construction and all new grants under programs like Community Development Block Grants (CDBG).

Abolish the Energy Department, and split its functions between the Defense Department and the Commerce Department, renamed the Department of Economic Growth. Consolidate the Department of Housing and Urban Development, the Department of Agriculture, and the Department of Labor in this new Department of Economic Growth as well. Replace the Education Department with funding for state Departments of Education across the country, as education is a state not a federal responsibility.

Then freeze all remaining federal non-defense discretionary spending until the budget is balanced.

Entitlement Reform

The entitlement reform in 1996 of the old, Depression-era, Aid to Families with Dependent Children (AFDC) program was shockingly successful. The federal share of funding for the program was sent back to each state in a finite block grant that did not vary with state spending on the program. Each state was then to use these funds for a redesigned welfare program based on work for the able-bodied. The state could then keep any cost savings from innovations and improved operations under the program, paying any higher costs from its operations itself. This replaced the perverse incentives of the old matching federal funds formula, where more federal funds were sent to each state the more it spent on the program, encouraging more state as well as more federal spending.

Under the revolutionary incentives of these reforms, state officials across the country reversed themselves to assiduously press welfare recipients to go to work. As a result, close to 60% of those formerly served under the old AFDC program went to work and got off welfare. Their incomes consequently increased and child poverty declined.

These same reforms can and should be extended to the 85 other federal, means-tested, welfare programs, including Medicaid, Food Stamps, and housing subsidies, with sweeping savings as a result. With states controlling all this funding along with the complete freedom to innovate and the proper incentives to do so, they can adopt new entirely work based welfare systems that would end poverty in America, unlike the failed liberal War on Poverty. (Note: the last liberal that won a war was FDR, two-thirds of a century ago. They can't do it anymore).

In regard to Social Security, workers should each be given the freedom to choose to substitute personal savings, investment and insurance accounts for some of their Social Security to start. They would each have the choice of shifting some of their payroll taxes to finance such accounts, with the accounts substituting to a proportionate degree for some of their future Social Security benefits. The accounts would be expanded over time to cover all of the benefits provided by Social Security, with life insurance to cover the survivors benefits, and disability insurance to cover the disability benefits.

Because long-term investment returns are so much higher than what Social Security even promises let alone what it can pay (because Social Security does not make any actual investment), workers would actually enjoy much higher benefits through these accounts. These benefits would be backed by a federal safety net guarantee assuring that everyone would get at least the benefits promised by Social Security under current law. But such accounts would also eliminate all Social Security deficits, as the government spending on those benefits is shifted to the accounts instead, as the Chief Actuary of Social Security has confirmed in official scores. This also results in a massive, unprecedented reduction in government spending as a result.

The accounts can then be expanded to cover the Medicare payroll tax, with the resulting benefits used to purchase private health insurance. The general revenues currently used for Medicare would be used for means-tested supplements to ensure that all seniors could afford essential health coverage. These general revenue expenditures would be limited to grow no faster than the rate of economic growth, so that they would not increase federal spending as a percent of GDP.

All Social Security and Medicare benefits would continue to be paid to seniors in full throughout the transition to this personal account system, with the government providing all necessary financing. That transition financing would be covered by the spending reductions discussed above.

These reforms would together reduce federal spending below 15% of GDP. The New Revolution spawned in reaction to the Obamunista socialist throwback power grab makes such sweeping reform possible. This should be the Tea Party agenda. Weak-kneed Republicans need to realize that they have one more chance to get control of Big Government, before they are consigned to the dustbin of history themselves. The above agenda is that chance. Buck up. The grassroots will have your back this time.

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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.