The Obama Watch

Washington’s Plot to Explode Your Taxes

How else will the Obama plan meet its goal of total social and economic transformation?

By 6.24.09

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Everyone in Washington knows the record Federal deficits and debt are out of control and can't continue. President Obama knows it. The ultraliberal Democrat Congressional leadership knows it. Rank and file Congressional Republicans and Democrats know it. Fed Chairman Ben Bernanke has been openly saying so.

Obama's economic policies, adopted by the Democrat-controlled Congress, call for total Federal borrowing of $3.5 trillion this year alone! The Federal debt is projected to soar over the next 10 years to a peacetime record of 84% of GDP, and to keep on growing past the all-time record of 113% of GDP during World War II. Rep. Paul Ryan, ranking Republican on the House Budget Committee, projects it will climb to 200% of GDP, twice the size of our entire economy. That would be 5 times the level of national debt that prevailed for decades before Obama.

This is the result of adding Obama's extreme, liberal left, Keynesian economic plan, with its trillion dollar stimulus package of wasteful spending that will do nothing to stimulate the economy, on top of the exploding costs of our current entitlement programs.

Obama's New Amerika

But not to worry, because the Congressional Democrat leadership and President Obama have a plan. First they are going to pass national health care, adding the biggest entitlement of all to the fiscal catastrophe we already have, giving new definition to the term fiscal insanity. Then, after that, they are going to come back to us and say, gee, we have no choice now but to raise your taxes, really, really, really raise your taxes, to record-shattering levels, to levels so high that it will change the fundamental nature of our economy and our nation.

After that, America will no longer be a land of prosperity and booming economic growth, as it has been for hundreds of years, since early colonial days. It will no longer enjoy the highest standard of living in the world. It will instead be America the Welfare State, with a government so big and overwhelming that everyone will be scrambling to get their personal gravy in government handouts, rather than producing for the marketplace and consumers.

Example Number 1 of this will be the new Obama health care system, where the doctors and hospitals will all be working for the government, who will be paying their bills, not you the patient, who will just be along for the ride. When the government tells them not to provide medicine for macular degeneration, or cancer treatment for senior citizens because it is not "cost effective," or referrals to specialists until it is too late, the doctors and hospitals will all hop to and salute, because they will be desperate for their slice of federal funding.

In this new system, everyone -- patients, doctors, hospitals, etc. -- will all be sacrificed for the "greater good," as defined by the liberal left. Doctors and surgeons now refusing Medicaid and Medicare patients because the government won't pay them enough will find the same government is refusing them adequate payment for everyone. Cost pressures will lead the government to clamp down more and more over time on payments to doctors, hospitals, drug companies, and other health providers. They will be vilified in the media just like the bank executives are now in regard to their traditional bonuses. As a result, investment will collapse in new hospital capacity and medical facilities, and development and adoption of new, cutting edge, health technologies and advanced, high tech, miracle drugs, sacrificing the interests of sick patients. This is how Canada got to the point where a hospital room could not be found in British Columbia for a mother experiencing accelerating birth contractions, and she had to be flown over the Rockies to the next state, Alberta, while giving birth, to find maternity care. Human capital will flee the health system as well, as older doctors retire early and new ones choose other professions instead, further constricting care for sick patients.

The Current Entitlement Catastrophe

Adding this new, massive, health care entitlement on top of the enormous entitlement mess we already have could not be more ridiculous and wildly irresponsible. The latest Trustees' Reports show that the current unfunded liability for Medicare alone is $89 trillion. Social Security adds another $15.1 in unfunded liabilities, for a total of $104 trillion. And that doesn't even count Medicaid. The entire American economy right now only produces about $14 trillion a year.

Since World War II, going back 60 years, federal spending as a percent of GDP has been stable, hovering around 20%. But the cost of the three big entitlement programs alone, Social Security, Medicare, and Medicaid, is now projected to balloon eventually to 20.5% of GDP. Counting burgeoning interest on the national debt, on our current course federal spending will rocket towards 40% of GDP. Counting state and local spending, total government in America will consume over 50% of GDP. GDP will collapse in the face of all that spending and the resulting taxation and debt, increasing the percentage of government spending further. America will no longer be a free country, at least in terms of the freedom of people to enjoy the fruits of their own labor and decide how to use what they earn for the pursuit of happiness.

This doubling of federal spending as a percent of GDP implies a doubling of federal tax rates. The Heritage Foundation reports that trying to pay all of the promised benefits of Social Security, Medicare, and Medicaid by raising income taxes would require raising the top 35% tax bracket to 77% and the 25% tax bracket paid by middle income earners to 55%. All income tax brackets, in fact, would have to be doubled.

By 2018, less than 10 years from now, Medicare Part A will be running a deficit of close to $100 billion. General revenue contributions for Medicare Parts B and D that year are now projected to be $364 billion. Consequently, the deficit for Medicare alone that year will be close to $500 billion (and that assumes a scheduled reduction in doctor and hospital reimbursements of over 20% starting in 2010). Yet, Obama and the Left are preparing to fight for an "option" for everyone to join Medicare or its equivalent as the answer to our health care problems. This is their "public option," which they say will keep insurance companies honest. But who is going to keep the government honest? These people just cannot be numerically literate.

How the Plot Will Work: A Tax Increase for 95% of Americans

After Obama's socialized medicine plan is passed, the hue and cry will start coming out of Washington, and will be echoed throughout the Democrat Party controlled media, that something has to be done about this fiscal catastrophe. The answer will be to appoint a new federal spending and tax reform commission, which will report back just after next year's election. America will then be permanently mangled by the enactment of extremist, bone-crushing taxes early in 2011.

Senate Budget Committee Chairman Kent Conrad (D-ND) is a leader of this plot. So is House Majority Leader Steny Hoyer (D-MD) as well as Speaker Nancy Pelosi. So are all the blue dog Democrats, led by Rep. Jim Cooper (D-TN). Unfortunately, so are some strategically inept Republicans and conservative institutions who are thinking now we need to get control of the long-term budget disaster, but are not thinking ahead concerning what such a Commission will mean in the current Washington thoroughly controlled by the liberal/left.

In fact, legislation for just such a Commission has already been introduced in both the House and the Senate, by Reps. Jim Cooper and Frank Wolf (R-VA), and Sens. Kent Conrad, Judd Gregg (R-NH), and George Voinovich (R-OH). The great majority of Commission members will be appointed by President Obama and the current ultraliberal Congressional leadership. It would be modeled on the base closing commission, with only one up or down vote allowed on the Commission's sweeping recommendations.

One leading conservative institution that favors this bill argues that it expects the Commission to deal with the long-term budget and entitlement crisis entirely by cutting government spending, which is what it favors. But who are they kidding? The liberal/left now in complete control of Washington, not to mention the so-called Mainstream Media, is not going to support cutting the welfare state in half. It is going to use the Commission to figure out how to finance doubling the welfare state, which is what Obama and the Democrat Congress are adopting now. Any such commission is just to provide political cover for massive, runaway tax increases.

Barack Obama won the White House with a campaign pledge to cut taxes for 95% of Americans. But now this plot is under way to increase taxes on 95% of Americans, to record, bone-crunching levels.

The Right Strategy: Congress Do Your Job

America is not Iran, or Russia or China. We are supposed to be governed by the Constitution and democracy, not by a Commission of supposed "experts." Conservatives should not be involved in this plot to subvert our capitalist economy, our Constitution and our democracy. They should be advocating the legislative reforms and policies that conservatives favor, and demanding that Congress do its job and enact these changes.

This means that Congress must first reject any new health care entitlement. They should focus instead on alternatives that ensure we have a real health care safety net in place so that no one will suffer without essential medical care. That is all that needs to be done, we don't need a government takeover of health care as the Left wants. Such legislation has already been introduced by Sen. Tom Coburn (R-OK) and Rep. Paul Ryan (R-WI), involving no net increase in spending or taxes. Another bill has just been introduced by Sen. Jim DeMint with even less government involved, which is more strongly supported by conservatives.

Secondly, Congress should repeal the badly confused stimulus, and end all further bailouts. Only a small fraction of the trillion-dollar stimulus has been spent so far, and it has not and will not work to stimulate the economy. You don't restore economic growth by borrowing a trillion dollars out of the economy for the government to spend a trillion dollars. That adds nothing to the economy on net, and does nothing for the fundamental incentives that truly drive economic recovery and growth.

Thirdly, contrary to what most half -baked commentators say, packages of tax increases and benefit cuts are not the only way to reform entitlements. Rather, we should advance fundamental reforms that restructure and modernize our entitlements from the bottom up. Such reforms can serve the goals of our current entitlements even better than our current old-fashioned programs, while costing far less.

For example, in 1996 we reformed the old Depression era Aid to Families with Dependent Children (AFDC) program by sending it back to the states with the Federal share of funding for the program in finite block grants. The old program provided matching federal funds for each dollar the state spent, so the states kept increasing their welfare rolls in good times and bad, bringing more federal funds to their state as a result. The new system provided that the amount of federal funding was fixed, and if the state spent more that extra money would all come out of its own pocket. But if the state spent less due to reform, it could keep the savings.

With these new incentives and the freedom to remake the program, the states focused on work requirements to reduce the program's rolls by close to 60% nationwide. Such reform should now be extended to the other 85 federal means-tested welfare programs, including Medicaid. Send them all back to the states under the same rules.

But Obama has done just the opposite, undermining this reform with new rules and welfare benefits adopted in his stimulus bill, which has already caused a reversal sharply increasing the welfare rolls.

Another opportunity is personal savings, insurance and investment accounts for Social Security and even part of Medicare. Workers should each have the freedom to choose to shift first some and then eventually all of their payroll taxes to such accounts, replacing all the benefits currently financed by those payroll taxes through the accounts. This would dramatically reduce federal spending over the long run, and phase out the deficits of Social Security and Medicare. But since over the long run, real market investments provide much better returns than Social Security even promises, let alone what it can pay, retirees would enjoy even higher benefits under such reform.

While our economy has suffered from a severe recession over the last year, such personal account investments are held for the very long term, for the entire adult lifetime of each worker. When we restore free market policies, the economy and investments across the board will boom again. Meanwhile, to ensure the social safety net of current entitlements continues, such reform can and should include a government guarantee that all retirees will get through the accounts at least as much as promised by Social Security. This would be far less than what such accounts would pay at standard, long term, market investment returns. The South American nation of Chile follows this same policy for its thorough personal account system adopted in 1981.

Such reforms are already included in the Ryan Roadmap, already introduced in legislation by Rep. Paul Ryan. That legislation has been officially scored by CBO as completely eliminating all long-term entitlement deficits, without any increase in taxes. Instead, the federal budget is balanced over the long term at 18.5% of GDP, smaller than the current Federal budget. Indeed, the Roadmap includes tax reform as well, with a new system applying a 10% tax rate on families with incomes up to $100,000 per year and singles up to $50,000, and a 25% rate on all incomes above that. Generous personal exemptions provide that a family of four earning up to $48,000 would pay no income tax.

Another round of tea parties is scheduled for July 4. The Washington plot to explode our taxes, and these alternative reforms, would be a good focus for tea party activists.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.