He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard College and Harvard Law School. He is author of The Obamacare Disaster, from the Heartland Institute, and President Obama's Tax Piracy, and his latest book: America's Ticking Bankruptcy Bomb: How the Looming Debt Crisis Threatens the American Dream-and How We Can Turn the Tide Before It's Too Late.
Latest posts by Peter Ferrara (see all)
- Just As With Reagan, Getting Tax Reform Right Today Is Key To Booming Economy - April 17, 2017
- Closing The Deal With Conservatives On Obamacare - March 24, 2017
- Senator Warren’s ‘Trust The IRS’ Bill - March 21, 2017
The competing budgets released last week by House Budget Committee Chairman Paul Ryan (R-WI) and Senate Budget Committee Chairwoman Patty Murray (D-WA) definitively define the growing differences between the two parties.
The bottom line on Ryan’s Republican budget is that it restores federal taxes and spending back near the long term, stable level as a percent of GDP that prevailed for 60 years after World War II, from 1948 to 2008. Federal spending during that time hovered around 20% of GDP, and federal taxes hovered around 18% of GDP. Ryan’s budget achieves balance by basically splitting the difference, with federal taxes and spending both settling in at 19.1% of GDP after 10 years.
The Democrats have attacked Ryan’s budget claiming it is “extremist” and “radical.” But these poll tested epithets cannot apply to a budget that merely restores the long term postwar trendlines for taxes and spending, which makes it “traditional,” rather than “extremist” or “radical.” Contrary to the extremist, abusive, Democrat rhetoric, Ryan’s budget can be criticized for not reducing federal spending and taxes below the long term postwar trendlines, which would be consistent with Republican rhetoric and promises about reducing the size of government.
However, Ryan’s budget does reduce federal spending to less than it would be otherwise, cutting spending by $4.633 trillion over the next 10 years (from the continuing spending increases). That reduces federal spending from today as a percent of GDP by 18%, which means the size of the federal government relative to the economy would be 18% smaller than today. That also means the size of the federal government today is nearly 20% bigger than it was during the 60 years after World War II, when America prospered as the richest nation in world history, with resulting, unprecedented, global military dominance.
Ryan’s budget also reduces spending to far less than Murray’s Senate Democrat budget. The Senate Democrats propose to increase current obese spending by an additional $2.1 trillion per year by 2023, when they propose to spend $733 billion more in that one year than Ryan proposes to spend. Senate Democrats propose to spend $5.7 trillion in 2023, which would be the highest government spending in one year by any government in world history, almost double Bush’s $2.983 trillion in 2008. Over the next 10 years, the Senate Democrats propose to spend $46.4 trillion, increasing annual spending by $10.4 trillion during that time compared to this year’s already wildly bloated spending. So which is the extremist, radical budget?
In fact, the Senate Democrat budget involves zero net non-defense spending cuts, even from spending increases, let alone from current spending levels. Senate Democrats propose to cancel the domestic sequester spending cuts, because they cannot bear even to cut 1% of government spending even from the increase in spending, and replace those sequester spending cuts with still another $480 billion tax increase. They also propose to increase the spending allowed under the spending caps adopted as part of the 2011 debt ceiling deal. Together, these proposals would increase domestic spending by close to $1 trillion. Moreover, the Senate Democrat budget proposes a further $100 billion spending increase for “infrastructure,” after the nearly $1 trillion, 2009 stimulus bill providing for the same, and failing to stimulate anything, except for federal spending, deficits, and debt
The Democrat budget claims $975 billion in spending cuts over the next 10 years, even though it actually increases spending dramatically as described above. But besides phantom savings over the next 10 years from supposedly ending the wars in Iraq and Afghanistan (was anyone ever planning to be spending as much in 2023 fighting those wars as during the height of the War on Terror years ago), or from eliminating “waste, fraud, and abuse,” the Democrat Senate budget also claims health care spending cuts producing “$275 billion in savings by further realigning incentives throughout the system, cutting waste and fraud, and seeking greater engagement across the health care system.”
Who ever thought so much could be saved by “seeking greater engagement?” Actually, what this involves is further reductions in Medicare payments to the doctors and hospitals providing health care for seniors, on top of the more than $700 billion in such cuts already adopted under Obamacare. This ploy has gone on in Congress for roughly 15 years, where such cuts to Medicare docs and hospitals are solemnly adopted in budget documents supposedly making the “tough” decisions. But then they are always cancelled when about to go into effect, and Congress is forced to recognize that if the docs and hospitals are not paid seniors are not going to get the health care they have come to expect from Medicare.
The Senate Democrat budget actually touts the Medicare cuts they enacted in Obamacare as “reducing health care spending.” But under those cuts, by the end of the decade seniors will be lined up behind welfare mothers in seeking health care, as what Medicare pays the doctors and hospitals will actually be less than what Medicaid pays them. And studies have already documented that Medicaid does not pay enough for the poor on the program to get timely and effective health care, and so they suffer worse health outcomes as a result, including premature death. The Democrat Obamacare policy on Medicare is like a national defense policy that seeks to achieve savings by just refusing to pay the manufacturers of the Navy’s ships, the Army’s tanks and bullets, and the Air Force’s planes.
Federal Taxes and Tax Reform
On taxes, Ryan’s budget makes exactly zero changes in the federal revenues expected under current law and policies, as reflected in current CBO baselines. That can be criticized for ratifying in the Republican budget the enormous tax increases just adopted on January 1, including supposedly $1.1 trillion for Obamacare, and $600 billion for the termination of the Bush tax cuts for the nation’s job creators, investors, and successful small business (aka “the rich”). (Let’s see how close the real world comes to these fanciful projections after the negative economic effects of those tax increases become apparent in the real world.) But it cannot logically or honestly be called “extremist” or “radical.”
But what Ryan’s budget does propose to enact is very good tax reform that will be central to reviving Republican political prospects in upcoming elections. Ryan proposes to overhaul the tax code leaving just two rates for the personal income tax, 10% for families making under $100,000 a year, and 25% for families making more. For corporate taxes, Ryan proposes to reduce the federal corporate tax rate from 35%, where it places U.S. corporate tax rates at the highest in the industrialized world, to 25%.
Ryan proposes to make such tax reform revenue neutral by closing loopholes, deductions and credits both for the personal and the corporate income taxes. What assures that this feasible, despite the mocking from commentators on the Left, is that these are the average effective rates that are paid at these income levels. That is why Ryan chose them. That means there are enough loopholes to close to achieve these rates on a revenue neutral basis, which is why Ryan sticks to no change in revenues from current law and policies in this budget.
Ways and Means Chairman Dave Camp (R-MI) has the responsibility to carry out this tax reform. And he is already well under way to doing that, on track to report out of committee a bill that the entire House can pass this year. That achieves numerous advantages for the Republicans. One is that the lower rates in this tax reform bill would be the most powerful pro-growth measure on the agenda in either house this year. Second is that the rates are very populist, clearly not tilted towards “the rich.” Thirdly, financing those rates by closing loopholes, and special interest deductions and credits, will perfectly counter Democrat demagogues assailing Republicans for failing to address unworthy tax preferences that benefit “the rich.”
Camp, in fact, will probably make his tax reform bill a net tax cut for the middle class, the first since the last significant tax cut for the middle class first adopted by the Republican Congress in 2001 (virtually all Congressional Democrats at the time voted against that tax cut bill). What Camp needs to recognize is that what is most important is passing a very good tax reform bill through the House that will promote economic growth, and not compromise that away trying to chase the butterfly of Democrat support to pass a bill in this Congress. Passing a top notch, model, tax reform bill through the House will frame the issue to greatly stir support at the grassroots in coming elections, and lay down a marker for what tax reform should be when the political pendulum swings back.
In contrast, what the Senate Democrats propose on taxes is still more tax increases, on top of the $1.7 trillion in tax increases already going into effect just this year. As the Wall Street Journal observed on March 15, “Democrats are demanding these new taxes even though the Congressional Budget Office projects that under current law revenues are expected to double to $4.96 trillion by 2023 from $2.45 trillion in 2012. But that is not enough.” Democrats propose another $1.5 trillion tax increase on top of these burdensome new revenues.
The bottom line on the Senate Democrat budget is that it constitutes a Big Government breakout beyond the stable levels of federal spending and taxes as a percent of GDP that prevailed for 60 years after World War II. It increases spending and taxes permanently beyond those levels, on a path to soar further beyond this 10 year budget window. Again, which is the extremist and radical budget?
The Senate Democrat budget does that primarily by refusing to consider any real entitlement reform, instead content to irresponsibly mischaracterize Ryan’s careful reforms, under which in my opinion not one senior, not one poor person, and not one member of the middle class will be hurt in any way. Indeed, as I have argued before and will again, seniors, the poor, and the middle class would enjoy better benefits and incomes under Ryan’s reforms. The Journal pointed out the folly of Democrat absence from the entitlement reform agenda, further saying on March 15, “Though Medicare and Medicaid are expected to double in cost by 2023, Senator Murray’s budget gives them a pass.”
Indeed, while Obamacare is now projected to impose soaring costs on the budget, nearly $2 trillion over the next 10 years, double the mistaken and misleading projections when Obamacare was passed, the Senate Democrat budget continues to tout those outdated original projections. CBO now says that almost 10 years after implementation Obamacare will still leave 30 million uninsured. But as I carefully explained with John Goodman in a NCPA publication last year, “Health Care for All Without Obamacare,” alternative market health care reforms would assure health care for all, with no coercive and counterproductive individual mandate and no job killing employer mandate, while saving taxpayers $2 trillion over the next 10 years.
While Ryan’s budget plan balances the budget in 10 years without any further tax increases, the Senate Democrat budget after 10 years, and another $1.5 trillion in tax increases, leaves America with a deficit of $566 billion in 2023. That is the highest in American history, except for the annual trillion dollar Obama deficits so far, higher even than Bush’s former record of $458 billion in 2008, in the depths of the recession. While Ryan’s budget after 10 years reduces federal debt held by the public to a manageable 54.8% of GDP, that debt after 10 years under the Senate Democrat budget is still 70% of GDP, which is only going to rise thereafter with no entitlement reform.
Finally, as the Journal correctly observed on March 13, “But the folks who put a balanced budget above economic growth have their priorities upside down. The important goal is promoting fast enough growth, and enough spending restraint, that debt falls from its current heights over time.” Ryan’s budget takes some recognition of that with his tax reform proposal. But the Republicans would achieve far more if they also recognized the even more critical need for monetary policy reform, and fundamental change at the Fed.
The Senate Democrat budget, however, does not even follow good Keynesian economics. They tell us preposterously, like Obama, that spending cuts would be bad for the economy, but tax increases wouldn’t (contrary to Keynesianism). They propose an infrastructure program to promote the economy, but finance it with a tax increase that removes at least an equal amount of aggregate demand. The Democrats will tell us anything they think will justify what they really want, which is explosive taxes, spending, and deficits to keep down the short term political costs of all that spending.
If that is what you want, you should be voting for the Democrats. If not, then you should not be, because that is what you will get.
[First published at Forbes.]