The Obama Budget

The President’s budget, announced yesterday, may have the finest calibration of budget details in the history of the human race. But, its delivery was not a political success and whether Budget Director Peter Orzag is a genius with numbers or not, he was not very adept as he made the round of the news shows yesterday explaining it.

The first thing to know about big annual announcements is that you need to decide in advance what you want the news cycle to focus on. It is not clear that the White House really thought that one through and, in the absence of any significant new direction or methodology, the press focused mostly on the size of the package. And that size is big, bigger than big actually, a stunning $3.8 trillion. As a news item, it plays directly into the Republican narrative that the President is spending our children’s future recklessly. It doesn’t matter whether the money is well spent, or needs to be spent. Unless there is news value in the way it is being spent, the press will focus merely on the size of the package.


Orzag was stuck defending goulash and budgetary goulash is difficult to defend. He discussed this proposal and that proposal. There was no central organizing theme. And, if you are defending goulash, he could have at least put budgetary honesty at the top of the list. You will recall that during the Bush Administration, the cost of the wars in Iraq and Afghanistan were not in the budget at all, so about $200 billion of the Obama increase is attributable merely to the President commitment to simple honesty. Make the republicans defend their prior budgetary dishonesty and see how that sits with the Tea Party crowd.

Most of all, Orzag and the administration have failed to articulate the need for higher taxes on the wealthy. The wealthy do not pay nearly the share of federal tax dollars that they paid in the 1950s and 1960s when the economy was booming. And, there are whole categories of taxes that they do not pay at all. Social Security and Medicare are funded through a payroll tax, so people who take their money as management or professional fees and those who make millions in investment income do not pay anything towards the solvency of Social Security or Medicare which are the two most expensive items in the federal budget. Why should a billionaire investor pay nothing towards Social Security while a waiter or teacher or factory worker pay 14% of their income in payroll taxes?

The last major overhaul of the tax code was in 1986. Whether the Democratic majorities in both houses of Congress survive the November elections or not, the President will be needing a bipartisan project for next year. It is not too soon to begin thinking about what that plan should be. But, the White House needs to think outside the box of very smart policy experts on this, and think about what will help make average Americans feel like someone is looking out for them. The answer, long proposed by Mike Kinsley, is a liberal version of a flat tax, retaining the progressive tax rates, but radically simplifying the code itself, ridding it of all the special tax breaks it contains, and removing the caps on payroll taxes and making those taxes more broadly applicable. After all, the Supreme Court has decided that corporations are individuals: Let’s tax them like they are.

Populism does not come easily or naturally to President Obama. He is not "one of the guys" and thank God for that. But, figuring out ways to address the budgetary crisis facing the nation is one big invitation to engage in the kind of populism the Republicans will have difficulty fighting. The tax code is not 14 volumes long because it needs to be. It is 14 volumes long because lobbyists have successfully gotten their special tax breaks inserted into it. The average Joe does not have a lobbyist doing anything for him. Obama needs to get past the policy experts, even the smart ones, and talk to the average men and women. See how they would react to such a proposal as a progressive flat tax. He might find that it is a winner, economically and at the polls.

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James Lindsay
8 years 11 months ago
A progressive flat tax is not the answer. There are more worthy proposals for a Value Added Tax by Michael Graetz, who would retain payroll taxes but would put a $50,000 individual/$100,000 family floor on income taxes. Len Burman would have the VAT pay for health insurance vouchers and simplify the income tax into two rates, with filing at the 15% rate occurring automatically by tax simplification. I would convert most low rate income taxes and payroll taxes into a VAT for discretionary spending and an expanded Business Income Tax for entitlements and the distribution of the Child Tax Credit. Military and naval deployments and debt financing would be paid for by the personal income tax, with a floor of $75,000 for individuals and $150,000 for families.

It would be nice if there were an overarching tax reform. The White House started working on the topic, but it has not found a champion so I am not expecting much. Most of us can't see a way out of the current budgetary quagmire without something in this area - however it appears that this administration is trying not to do anything to stifle the recovery. They may have something here - although it is high risk if the Chinese decide to stop buying our debt.
8 years 11 months ago
The idea that you can continue to spend at the level proposed in this budget & tax the wealthiest taxpayers more & generate the kind of economic growth the country experienced in the 1950s & 1960s is as big a pipedream as the "Great Society" of the 1960s.  First of all, the level of government spending during that time was miniscule compared to the current situation.  The budget doesn't even begin to deal with the real mess of the entitlement problem.
James Lindsay
8 years 11 months ago
There are four main entitlements to consider:

Social Security
Medicaid for the elderly
Medicaid and other entitlements for the poor

The last is not what is throwing the budget out of whack - although all three at the bottom could be easily replaced by a single payer insurance plan funded by an employer payroll tax. Then the challenge is simply to make the tax match spending in any given year. With profit and attempts at cost avoidance gone, it would likely save money. There is no stomach for it, however.

The other alternative is to find a way to have employers provide health care directly (without third party payment). That is actually much more of a "libertarian" method than to allow for profit corporations to offer third party insurance for profit in an oligopolistic or even monopolistic market (which is the status quo, by the way).

Social Security itself is fine, especially with reasonable demographic and economic assumptions. Indeed, any proposal to transition to a privatized system where index fund investments replace the current plan fail the smell test after the recent and continuing downturn. The only realistic alternative is to channel funds to employee ownership of the workplace. Usually conservatives bristle at such a notion - even though it is in keeping with Catholic Social Theory.

Social Security does have a small funding problem, however, in the short term. In order to increase its long term balance, it was programmed to run a surplus to build up the assets for the retirement of the Baby Boom generation. Those assets cannot be redeemed by raising Social Security taxes. Instead, they must be redeemed with either non-entitlement budget cuts (most likely to the Pentagon budget) or through raising marginal tax rates - with the most likely targets of such a tax increase being those whose taxes were cut by Reagan and the Bushes, since increasing their taxes would not curtail the spending of most households and therefore be a drag on economic growth. Indeed, such tax increases might be salutory, since it would take funds out of the stock market and thus prevent asset valuation bubbles in housing, tech stocks, etc., which tend to happen when you cut marginal tax rates broadly. There would have been no rush to fund toxic mortgages if rich people weren't seeking high yeild securities because they had too much money to invest.
8 years 11 months ago
"find a way to have employers provide health care directly (without third party payment)."
Why should it be the responsibility of employers to provide health insurance (I assume you mean to say rather than health care)?  Since when does having a job equate with being entitled to health insurance?  Wouldn't the "libertarian method" favor each person procuring health insurance for themselves?
And get back to me when you single payer system gets enacted.


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