Topic: Tax and Budget Policy

The Need for Discretionary Spending Restraint

The Obama administration released its 2015 budget this week. The budget shows federal debt held by the public falling from 74 percent of gross domestic product (GDP) this year to 69 percent by 2024. That reduction occurs even though entitlement and interest spending are projected to rise substantially as a percent of GDP.

One of the tricks behind the projected falling debt is that the administration assumes that discretionary spending falls sharply as a percent of GDP in later years. Congressional Budget Office (CBO) projections show a similar decline in discretionary spending in coming years.

I favor large discretionary reductions, and I have proposed many specific cuts. But does the Obama administration really favor the reductions down the road shown in its own budget? I doubt it. After all, the administration’s new spending proposals would break existing budget caps, and that would come in the wake of both parties breaking caps under the Ryan-Murray budget deal. So projecting declining discretionary spending in later years is an accounting ploy to make the fiscal outlook look better than it really is.

If policymakers don’t restrain discretionary spending, deficits and debt will be higher in coming years than shown in official projections. Let’s call this the “business as usual discretionary spending” scenario.

Here are the implications of the scenario, based on the CBO baseline and my calculations. Let’s suppose discretionary spending remains at the 2014 level of 6.9 percent of GDP through 2024, rather than falling to 5.2 percent as shown by CBO. That higher spending results in interest costs 0.4 percentage points of GDP higher by 2024.

Under this scenario, total outlays would rise from 20.5 percent of GDP today to 24.5 percent by 2024. The deficit would rise to a dangerous 6.2 percent of GDP.

Under the CBO baseline, federal debt rises from 74 percent of GDP today to 79 percent by 2024. But under my business as usual scenario, debt would soar to 91 percent by 2024, as shown in the chart. It would keep rising rapidly after that.

In sum, I hope that discretionary spending as a percent of GDP falls, as shown in the CBO and Obama projections. But without proactive efforts to cut and terminate programs, that may not happen. Of course, entitlement spending also needs to be cut.

However, if business as usual prevails in Washington with entitlement spending gobbling up more of GDP and discretionary spending not cut, we’ve got a really big fiscal crunch coming.

More Taxes than Meet the Eye in Obama’s Budget

Yesterday’s budget from President Obama claimed to raise taxes by $650 billion, which would come in addition to the $650 billion in tax hikes in January 2013. However, it appears that the president wants much more money from our pocketbooks. The exact amount isn’t entirely clear due to the games the Office of Management and Budget is playing with its various tables. But if the president had his way, more than $1 trillion in tax hikes would be coming.

Here are some of the tax hikes the president is proposing:

  • “Buffett tax” ($53 billion): President Obama resurrected this tax idea, which would require high-income individuals to pay at least 30 percent of their incomes in taxes.
  • Limiting tax deductions ($598 billion): President Obama would limit the value of itemized deductions for high-income earners.
  • Changes to the “death tax” ($131 billion): The president suggests going back to the estate tax rules of 2009, which would increase the marginal tax rate on estates and lower the exemption, subjecting more assets to taxation.
  • Changes to oil and gas taxation ($44 billion): Frequently criticized by the president, these tax provisions are generally not subsidies to oil and gas companies, but instead ameliorate the tax code’s improper treatment of capital expenditures.
  • Changes to international taxation ($276 billion): Instead of moving the United States to a territorial tax system like most other industrialized countries, the president moves in the opposite direction and proposes further raising taxes on corporations with overseas earnings.
  • Cap on 401(k) and IRA contributions ($28 billion): This provision would prohibit individuals from contributing to retirement accounts if their balances were greater than $3 million.
  • Increase in tobacco taxes ($78 billion): To pay for his universal pre-K proposal, President Obama would increase the tobacco tax from $1.10/pack to $1.95/pack.

On tax policy, the president’s budget trots out old, tired, blame-the-rich rhetoric rather than tackling the country’s real problems.

Obama’s New Budget: Burden of Government Spending Rises More than Twice as Fast as Inflation

The President’s new budget has been unveiled.

There are lots of provisions that deserve detailed attention, but I always look first at the overall trends. Most specifically, I want to see what’s happening with the burden of government spending.

And you probably won’t be surprised to see that Obama isn’t imposing any fiscal restraint. He wants spending to increase more than twice as fast as needed to keep pace with inflation.

Obama 2015 Budget Growth

What makes these numbers so disappointing is that we learned last month that even a modest bit of spending discipline is all that’s needed to balance the budget.

By the way, you probably won’t be surprised to learn that the President also wants a $651 billion net tax hike.

That’s in addition to the big fiscal cliff tax hike from early last and the (thankfully small) tax increase in the Ryan-Murray budget that was approved late last year.

P.S. Since we’re talking about government spending, I may as well add some more bad news.

Nothing to Celebrate in Obama’s Budget

President Obama released his fiscal year 2015 budget request today. Sadly, for those who support smart, sensible budgeting, the president’s budget is nothing to celebrate. The budget increases spending and fails to tackle the main driver of our budget problem—entitlement spending. All deficit reduction included in the budget is from revenue increases, not spending cuts.

In coming days, we’ll be analyzing the president’s budget in detail, but here are the top-line numbers:

1. The president’s budget proposes spending more than the Ryan-Murray budget deal passed in December. Under the agreement reached by Congressman Ryan and Senator Murray, and supported by the president, discretionary spending for fiscal year 2015 should be $1,014 trillion. The president’s budget includes a section that bumps that up by $56 billion, paid for mostly by tax increases.

2. Over the 10-year budgetary window, the president spends $171 billion more than Congressional Budget Office (CBO) baseline. The budget also runs large deficits every single year.

3. According to Obama’s budget, the federal government will collect $3.3 trillion in tax revenue in 2015, more than any other year in history. The budget includes $650 billion in new revenue though various tax hikes. The president’s Office of Management and Budget also made rosier assumptions about economic growth over the next 10 years than did the CBO. As a result, the president’s budget would collect an additional $3.1 trillion in revenue over 10 years than CBO assumes.

Will Venezuela Be Next?

Last year, Nicholas Krus and I published a chapter, “World Hyperinflations”, in the Routledge Handbook of Major Events in Economic History. We documented 56 hyperinflations – cases in which monthly inflation rates exceeded 50% per month. Only seven of those hyperinflations have savaged Latin America (see the accompanying table).

At present, the world’s highest inflation resides in Latin America, namely in Venezuela. The Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, estimates that Venezuela’s implied annual inflation rate is 302%. Will Venezuela be the eighth country to join the Latin American Hall of Shame? Maybe. But, it has a long way to go.

The Hanke-Krus Hyperinflation Table
Latin American edition

Country Month With Highest Inflation Rate Highest Monthly Inflation Rate Equivalent Daily Inflation Rate Time Required for Prices to Double
1. Peru Aug. 1990 397% 5.49% 13.1 days
2. Nicaragua Mar. 1991 261% 4.37% 16.4 days
3. Argentina Jul. 1989 197% 3.69% 19.4 days
4. Bolivia Feb. 1985 183% 3.53% 20.3 days
5. Peru Sep. 1988 114% 2.57% 27.7 days
6. Chile Oct. 1973 87.6% 2.12% 33.5 days
7. Brazil Mar. 1990 82.4% 2.02% 35.1 days

Source: Steve H. Hanke and Nicholas Krus (2013), “World Hyperinflations”, in Randall Parker and Robert Whaples (eds.) Routledge Handbook of Major Events in Economic History, London: Routledge Publishing.

Grading the Camp Tax Reform Plan

To make fun of big efforts that produce small results, the Roman poet Horace wrote, “The mountains will be in labor, and a ridiculous mouse will be brought forth.”

That line sums up my view of the new tax reform plan introduced by Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee.

To his credit, Chairman Camp put in a lot of work. But I can’t help but wonder why he went through the time and trouble. To understand why I’m so underwhelmed, let’s first go back in time.

Back in 1995, tax reform was a hot issue. The House Majority Leader, Dick Armey, had proposed a flat tax. Congressman Billy Tauzin was pushing a version of a national sales tax. And there were several additional proposals jockeying for attention.

To make sense of the clutter, I wrote a paper for the Heritage Foundation that demonstrated how to grade the various proposals that had been proposed.

Chairman Murray’s Memo: More of the Same

Today, Senate Budget Chairman Patty Murray sent her caucus a memo on the country’s fiscal outlook. She details the “$3.3 trillion in deficit reduction put in place over the last few years;” a likely refrain in President Obama’s budget next week. However, Chairman Murray’s memo leaves much to be desired.

The first section of Murray’s memo highlights the various ways that the deficit has been reduced over the last several years by Congress and the President. The bulk of savings are from the discretionary spending caps put into place by the Budget Control Act (BCA) of 2011. Another large share of deficit reduction came from $727 billion in tax increases over the last several years. All told, Murray counts $3.3 trillion in deficit reduction. This is an incredibly small step to tackling our $4 trillion budget.

But after detailing all of the great things this fiscal restraint is doing for the country, Chairman Murray completely turns course. Instead of detailing additional ways to cut spending and continue these marginal improvements, she starts a laundry list of needed government “investments”—spending programs. She calls for more spending on infrastructure, jobs programs, a minimum wage increase, and increased funding for research and development.

Also notably, she also does not include future sequester cuts in her numbers; an implicit acknowledgement that she does not plan to keep those promised cuts.

Chairman Murray’s memo also fails to acknowledge the impending fiscal crisis. According to the most recent Congressional Budget Office (CBO) report, the country’s debt and deficit are stable for the next few years, but by 2017 they increase dramatically again. CBO expects the deficit to rise to 4% of GDP by the end of the decade. Even though, revenues as a percent of GDP will be close to historical levels, Chairman Murray calls for more tax hikes, ignoring the real driver of our fiscal issues: spending.

The refrain from many over the last year has been that the deficit is back under control, and that Congress should go back to wildly spending. Chairman Murray’s memo follows that path. It fails to acknowledge the need for fiscal restraint and sets the stage for next week’s release of the President’s budget.