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European-style austerity: Obama’s new ‘balanced’ debt plan is 73% tax hikes

White House Flickr stream

White House Flickr stream

President Obama’s opening bid in budget talks with congressional Republicans is a reheating of his 80-page deficit reduction package from September 2011. The president calls it a “balanced” plan. Well, here it is:

Now, according to Obama’s math, his “balanced” plan cuts the projected cumulative debt by $4.4 trillion over ten years with 36% of the reduction coming from $1.6 trillion in tax increases — 80% from wealthier Americans, 20% from business. So, basically, $2 in spending cuts for each $1 in tax hikes. “Balanced.”

But once you begin to dig into the numbers, the plan doesn’t look balanced at all. As the bipartisan Committee for a Responsible Federal Budget noted back then:

The Administration claims that the plan would save about $4.4 trillion in total (including interest savings, war savings, and the costs of the jobs proposals). However … counting the war savings is counting a policy that is already in place and is thus a gimmick to be avoided. Taking out the war savings and savings from the discretionary cuts in the Budget Control Act leads to total savings of less than $2 trillion.

Of the supposed savings, then, $1.6 trillion comes from tax hikes and $577 billion comes from spending cuts, not counting saved interest. So 73% of the savings comes from taxes, 27% from spending cuts. That’s $3 of tax hikes for every $1 of spending cuts.

Even if you include interest savings, 60% of the debt reduction comes from tax hikes. Obama is making the exact mistake Europe is making by employing a tax-hike heavy version of fiscal austerity. Indeed, a 2010 analysis by AEI scholars found that successful fiscal consolidations are heavy on spending cuts, light on tax hikes. Even Bill Clinton’s debt reduction plan was 2-1 in favor of spending cuts. The Obama plan is dangerously unbalanced, especially given the weak economic recovery.

106 thoughts on “European-style austerity: Obama’s new ‘balanced’ debt plan is 73% tax hikes

  1. Yes, of course there will be continued payments to beneficiaries. But the money to pay beneficiaries again, is coming from current FICA taxes. There is no store of money or checking account to draw from. However, as more people retire, the obligations outpace the collections from FICA. Social security then has to be paid with other sources from the treasury. Again other taxes, bonds or other sources of revenue. The curves flip. What once was a revenue stream to the general fund now becomes a drain on the general fund. Again back to the original point. The general fund itself is in massive deficit, therefore, it cannot finance the the obligations without giving up something else. Highr taxes, cutting spending elsewhere, or borrowing more.

    • ” ocial security then has to be paid with other sources from the treasury. ”

      not according to current law. Benefits will automatically reduce.

      there are a number of different ways to change SS (as has been done in the past) to keep it in balance and not require subsidies from the treasury.

      In terms of the CURRENT deficit and debt and the factors that are causing it – SS is not an issue.

      It’s a future problem that there is time to fix –

      there are 30 options under consideration:

      http://crfb.org/blogs/cbo-releases-report-social-security-reform-options

      • Yes, absolutely right. In terms of current, and past deficits, social security is not affecting that. It is the future demographics that are the problem. More so with Medicare. Interesting that you note that benefits can be cut. They can absolutely be cut, which is one of the reasons it is not a very good deal. Many do not like to mention this aspect of things as it is typically discused in terms of an iron clad obligation. Many AEI would argue instead for some degree of ownership rather than be dependent upon the future state of finance of our federal government.

        Done for now. Hopefully we can at least agree that social security has not been contributing to the debt, but instead has been actually contributing to the general fund, to help make the finances look better than they actually are on a yearly basis. We spend too much relative to what we take in on defense, other nondefense discretionary spending, and mandatory, non FICA related obligations. We either have to pare back what we want to spend or find other revenue sources. Cannot continue on the current path. I hope we can cut spending and grow our economy out of the debt problems. But we will see. Not hopeful.

        • ” Hopefully we can at least agree that social security has not been contributing to the debt, but instead has been actually contributing to the general fund, to help make the finances look better than they actually are on a yearly basis. ”

          well.. it has kept the debt internal rather than external but it is still debt.

          the other thing I would mention is to ask yourself how many other things that you know of when talking about unfunded liabilities – both public and private are done so with a 75-year horizon?

          If you looked at the DOD unfunded liabilities for it’s retiree pensions/health care – over a 75-year horizon.. what would they be? and there is no FICA “fix” for the military unfunded liabilities – they come out of the general revenues just like Med Part B for civilians do.

          • Larry

            You are only half right. As a military retiree I pay for my health care, and it isn’t the greatest. My retired pay as you call it is retainer pay, yes we can be recalled to active duty and all of the military rules still apply to us. So before you consider cutting or reducing military retiree benefits remember no politician ever gave you your freedom! It was those who served in the military.

          • re: military benefits

            I’m not advocating reducing it any/more or less than any other entitlements but I AM pointing out that the military ALSO pays entitlements AND there ARE unfunded liabilities associated with them and the costs are paid for by taxes on everyone.

            I also point out that military retirees receive Social Security and Medicare also.

            if we want to talk about the costs of entitlements and future unfunded liabilities – we need to talk about ALL of them.

            right?

        • Social security was in the red by $36 billion in 2010 and will be in the red for the next 20 years. Since there is no lock box of cash it is indeed adding to the deficit! Yes, the lock box has T-bill and T-bonds, but Treasury bonds are liabilities to the government not assets. It’s just IOUs. When SS spends more than it’s takes in, the government must sell some more bonds to generate the cash for disbursements. How else??

          • re: ” Social security was in the red by $36 billion in 2010″

            yes.. because of the temporary 2% payroll tax “stimulus” cut that is going away.

            but compare and contrast 36 billion with a trillion deficit.

            when you talk about the trust fund – do you understand that 800+ billion a year comes from FICA and gets paid out to beneficiaries – regardless of the trust fund?

            re: ” When SS spends more than it’s takes in, the government must sell some more bonds to generate the cash for disbursements. How else??

            not when the trust fund is at zero. By law, Social Security must reduce benefits to be no more than what FICA brings in.

            SS is the ONLY expenditure in the budget that will not let you spend more than the tax dedicated for that purpose.

            here’s some reading that is factual and NOT AEI propaganda:

            http://www.cbpp.org/cms/index.cfm?fa=view&id=3299

            http://www.gao.gov/assets/210/200562.pdf

  2. “Even if you include interest savings, 60% of the debt reduction comes from tax hikes.”

    James,
    I guess you haven’t read my book yet? That’s OK, everybody is very busy. I don’t want to split semantic hairs, but as you can see the national debt increases each year under Obama’s budget (it also increases each year under Bowles/Simpson). So if debt is increasing, I don’t think the term “debt reduction” fits.
    I realize in DC “debt reduction” is used to mean lower debt increases just as “spending cuts” is used to mean lower increases in spending than heretofore budgeted. No where else in the country – in no for-profit company – is the term “spending cuts” used to mean spending increases.
    Thank you and keep up the good fight.

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