WASHINGTON, March 21, 2015 — President Obama and the U.S House of Representatives have delivered competing budget proposals for fiscal 2016, which begins in October. There are vast differences between the two proposals. Which is really best for the majority of Americans?
The president’s budget calls for increased spending on most income transfer programs. It increases spending on Obamacare, adds almost $200 billion in new spending for infrastructure and raises taxes on those the president calls “the wealthy.” This essentially means tax increases on investors who supply the capital to grow the U.S. economy as well as added tax burdens for businesses and estates.
Overall, the president’s budget increases total spending from $3.5 trillion in 2014 to more than $4.2 trillion in 2017. It also adds more than $6 trillion to the public debt, raising the ever-escalating total to almost $25 trillion by 2026.
Recently introduced by Rep. Tom Price, R-Ga., the new chairman of the House Budget Committee, the House of Representatives’ proposal calls for eliminating wasteful programs while attempting to reform the tax code to the point where revenue can be increased without raising tax rates, with an aim toward balancing the budget by 2024.
But how can tax revenue increase when tax rates are reduced?
Currently, scores of U.S. companies have relocated their corporate headquarters outside the U.S., primarily to take advantage of lower tax rates in foreign host countries relative to the current 35 percent corporate income tax rate in the U.S., which is the highest in the developed world.
If the U.S. were to decrease that rate to 25 percent or less, it is highly likely that most of those companies would relocate their corporate HQs back to the U.S. Some foreign companies might even choose to relocate to the U.S., multiplying the positive effect. Ultimately, the lower rate would lead to an increase in corporate tax revenue for the federal government while encouraging companies to return badly needed jobs to our shores.
In addition, by reducing tax rates on investment income while providing other incentives, economic growth could increase from just over the 2 percent rate experienced during the current Obama administration to over 3.5 percent, which has been the norm throughout most of our recorded fiscal history. This change alone could raise more than $3 trillion in additional revenue over the next decade while still reducing the tax burden.
The resulting higher growth would also provide more jobs, which will further reduce the stubbornly high unemployment rate as based on the broader U-6 unemployment figure that still hovers around 10 percent. With more people working, more people will be paying taxes and fewer people will be collecting government handouts. These relatively simple measures form the basis for the spending reductions in the House’s budget figures for food stamps and welfare payments.
The president claims that the House budget will cut spending for the neediest people by reducing the amount spent on food stamps and welfare. On the surface at least, that’s true. But examining the House budget more closely reveals that the spending in these areas will fall because there will be fewer people who need these federal government handouts once they start working and earning. This is precisely the path that Reagan and Clinton followed in the 1980s and 1990s, and we’ve already seen−twice−that it works.
Where do our tax dollars actually go?
More than half of all federal government spending currently goes to so-called entitlements: Social Security, Medicare, Medicaid and other health care programs. Another 19 percent goes to other income maintenance programs like food stamps and welfare. That’s a total of 70 percent of the federal budget that goes to transfer programs and entitlements. (The definition of a transfer program is one that takes income away from people who have earned it and gives it to people who, for whatever reason, have not earned it.) The total figure here represents about $2.5 trillion in expenditures this year.
The remaining 30 percent of the budget, about $1 trillion, is all that remains to pay for national defense, transportation programs, education programs, all other programs and the massive interest on our ballooning public debt. Even at today’s abnormally low interest rates, interest on the public debt accounts for 7 percent of the total federal budget. As interest rates begin to rise, likely later this year, this figure will increase steadily and substantially as current debt instruments are rolled over and refinanced at higher rates.
Significantly, the FY 2016 House budget also provides no funding for Obamacare, a direct challenge to this massive new entitlement program that the president says he will never approve. But if in June, the Supreme Court decides for the plaintiffs in King v Burwell, Obamacare will essentially be gutted anyway, forcing the president and Congress to come up with a new plan. Should this come to pass, no funding for Obamacare is necessary.
Reasonable individuals know that they cannot continue indefinitely to spend more money than they earn. Eventually, fiscal irresponsibility catches up.
In business it is acceptable to employ debt to acquire an asset or to make other investments that will eventually provide a solid return. However, if a company uses debt to finance its day-to-day expenses, as the U.S. government has been doing for many years, that generally viewed as the first warning sign that a company is in financial trouble and perhaps on the verge of going bankrupt.
Unless the U.S. is able to bring the federal deficit down significantly with the goal of at least coming close to creating a balanced budget, this country may find itself in serious financial trouble sooner rather than later. The profoundly negative consequences that will ultimately follow will likely be of little concern for most of those making crucial financial decisions today. Instead, it is the children and grandchildren of current generations who will eventually have to deal with the fiscal irresponsibility of their parents and grandparents.
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