Business Ethos Blog

Tax and Spend Again

Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University


Dr. David MielkeThe President unveiled his budget for fiscal year 2015 starting October 1, 2014.  His budget calls for an increase in spending and taxes on upper income Americans.  New policy goals were not included and instead included many of the measures that he had previously proposed.  It did not include any changes to entitlements or any real move to reduce the deficit or any plans to improve the economy.  Even though it is an election year and as a result the usual intention to provide spending for critical Congressional elections, should the budget contain overhauls necessary to spur the economy and reduce the debt?  Is this budget the “Right Thing to do?”  Let’s look at some issues:

1. The President’s framework is constrained by a two year deal on discretionary spending struck in December. Discretionary spending is set at over $1 trillion.  The President faces an uphill battle to make any changes to what Congress agreed to and he signed into law.

2. President Obama stated that the federal government has been facing austerity.  Is this really the case given that the feds spent $2.98 trillion in 2008 and the proposed budget will spend $1 trillion more in 2015—that is over a third more in just 6 years?  How many households have been able to increase their spending by one-third since 2008?

3. The proposed budget increases outlays by nearly $450 billion–over a 10% increase from 2014.  The spending equates to 21.4% of GDP, up from 20.8% in 2013.  Outlays are expected to increase by another $1 trillion by 2020, much of it fueled by exploding costs of Obamacare.  If approved the budget is seen as rising to $6 trillion by 2024, another 50% in less than 10 years.

4. The budget proposes about $1 trillion in new taxes over the next 10 years, with almost all of that coming from higher taxes on estates, business and upper income earners.  There would also be limits on tax breaks and creation of what the White House calls a “Fair Share Tax”.  That prohibits some earners from lowering their tax rate below a certain level—that is can’t use all the deductions after reaching a certain amount.

5. The White House estimated that its budget would produce a $564 billion gap between revenue and spending, that is increase the debt.  The proposed budget increases spending by $450 billion.  What if the budget was set at the same amount as this year without the $450 billion increase—would our budget deficit then be only $100 billion?  Haven’t other governmental units frozen their budgets at a time of financial stress?

6. The President again proposes to fund public preschool for every 4 year old and create a new fund to underwrite paid family leave in the states.

7. There’s more money for job training.  Didn’t the President ask Joe Biden to form a committee to review the existing 47 federal job training programs in his State of the Union speech?  The objective was to eliminate inefficiencies and duplication and he now proposes one more?

8. The budget includes some changes to entitlement programs such as Medicare and Social Security, but stops well short of structural changes.  He abandoned his earlier proposal to change the computation for cost of living adjustments for social security.  Spending on entitlements are expected to reach 36% of spending in 2015 and 40% of spending in 2024.

9. The budget estimates interest paid on federal debt will more than triple in the next 10 years, from $251 billion in 2015 to $886 billion in 2024, as interest rates rise and the debt continues to grow.  Yet there is no attempt to reduce the debt?

10. Millions of Americans already pay no income taxes, and Mr. Obama would take more of them off the rolls by expanding the Earned Income Tax Credit. to 13.5 million childless Americans–at a cost of $60 billion over 10 years.  These credits are refundable which means you get a check even if you have no net tax liability.  The Inspector General’s office estimates that the current program loses at least $11 billion a year due to improper payments. Eliminating the fraud would provide more than enough to make these changes and still reduce the budget impact.

11. The budget also includes new spending for research, alternative energy, infrastructure construction and the National park system.

It is an election year and there is concern that the Democrats might lose the Senate and be unable to regain the majority in the House.  Is this budget poised to be the basis for the campaigns this year?  Is this the Democrats best approach to change the debate from Obamacare and return to the historical approach of tax and spend—again?