February 2013

A Spending Problem, Not a Tax Problem

by John R. Hendrickson

President Barack Obama and Democrats in Congress are arguing that not only has the economy started to recover, but the solution to paying down the national debt and lowering deficits is to place higher taxes on top income earners. President Obama’s progressive vision as cast both in his policies and in his Second Inaugural Address offers an explanation for the current state of decline in national affairs. Columnist Charles Krauthammer, writing in National Review Online, stated that the President’s Second Inaugural Address “was a paean to big government,” and a “pledge to defend unyieldingly the 20th-century welfare state and expand it unrelentingly for the 21st.”[1]  Krauthammer described President Obama as “the apostle of the ever-expanding state.”[2] President Obama’s philosophy is not just creating economic uncertainty, but also undermining the constitutional foundations of the nation.

The massive $16.4 trillion national debt is a significant factor that is leading to economic uncertainty and threatening the security and stability of the nation. Economist Larry Kudlow noted that “during President Obama’s first term, the federal debt rose by roughly $6 trillion.”[3] Former Congressman Ron Paul (R-TX) wrote that the “federal government relentlessly spends about $100 billion more each month than it collects in taxes.”[4] “This means roughly 40 percent of every dollar Washington spends is borrowed, to be ‘paid back’ only in highly devalued, newly created money,” argued Paul.[5]

Writing in Hoover Digest former Secretary of State George P. Shultz and noted public policy scholars Michael J. Boskin, John F. Cogan, Allan H. Meltzer, and John B. Taylor noted the urgency and importance of dealing with the national debt. The authors described the spending problem:

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion in 2012. The four-year increase in borrowing amounts to $55,000 per U.S. household.[6]

The Democrat response to this spending problem argues that the government has a revenue problem, which translates into the need for higher taxes to generate more revenue. They also argue that spending or “investing” in programs such as the Patient Protection and Affordable Care Act, green energy, education, and infrastructure will result in savings for the future. The source of the new revenue as explained by the progressives/liberals will come from the wealthy, which as they argue, “need to pay their fair share.”

Although raising taxes on the wealthy may appeal to proponents of class-warfare politics it will nevertheless lead to further economic decline. The top income earners are already “paying their fair share” and taking more of their income will not even come close to solving the debt crisis. It should be noted that “the top 1 percent pay 37 percent of all income taxes, while 50 percent pay none.”[7]

President Obama has also not offered a solution to solve the debt problem:

President Obama’s budget called for raising the federal debt-to-GDP ratio to 80.4 percent in two years, about double its level at the end of 2008. Under this budget, the debt expands rapidly to $18.8 trillion from $10.8 trillion in ten years. The interest costs alone will reach $743 billion a year, more than we currently spend on Social Security, Medicare, or national defense…Worse, the unfunded long-run liabilities of Social Security, Medicare, and Medicaid add tens of trillions of dollars to the debt, mostly because of rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits.[8]

The result of this out-of-control spending along with the growing costs of the welfare state will result in “ever-higher income and payroll taxes on all taxpayers that will reach over 80 percent at the top and 70 percent for many middle-income working couples.”[9] These tax rates would cripple the economy and lead to ruin.

The debt crisis and the policies emerging from President Obama are fueling economic uncertainty, which is why unemployment remains high. Individuals and businesses are uncertain over tax policy, regulatory policy, and the impact of the Patient Protection and Affordable Care Act. Other factors include the threat of inflation as a result of the Federal Reserve’s Quantitative easing policy and the devaluation of the dollar.

Secretary Shultz and his colleagues argue correctly that “the problems are close to unmanageable now,” but they do offer some sound policy solutions:[10]

The fixes are blindingly obvious. Economic theory, empirical studies, and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation, and education reform.[11]

The problem is that it is unlikely that President Obama will compromise with Republican policymakers to move even to the political center on these issues. As Michael Tanner, a Senior Fellow at the Cato Institute wrote:

In the President’s world, unreformed welfare worked and entitlement programs have not led this country to the brink of bankruptcy. Indeed, the President sounded as if he had suddenly discovered a magic money tree growing out behind the White House. He called for all manner of new spending on education, infrastructure, and fighting poverty at home and abroad, while vowing to protect Social Security, Medicare, and Medicaid from any serious efforts at reform. The need to get the deficit under control received a cursory mention — the inevitable reference to ‘tough choices’ — followed immediately by a promise for more ‘caring’ and ‘investing.’ After all, ‘when times change, so must we.’ And so will basic math, apparently.[12]

President Obama’s political philosophy totally rejects the principle of constitutional limited-government, which is what is needed in order to solve this debt crisis. David Malpass, a noted economist, recently wrote an article for Forbes with the title “The U.S. needs to win the battle to limit government now.”[13] The outcome of this battle will determine the future of the nation. As Patrick J. Buchanan wrote: “As Obama’s America rises, the old republic falls.”[14]

John R. Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Charles Krauthammer, “Obama: Reagan of the Left,” National Review Online, January 24, 2013, < http://www.nationalreview.com/articles/338750/obama-reagan-left-charles-krauthammer> accessed on January 28, 2013.

[2] Ibid.

[3] Larry Kudlow, “Without deep spending cuts, the Republicans lose the House in 2014,” National Review Online, January 18, 2013, < http://www.nationalreview.com/articles/338105/without-deep-spending-cuts-republicans-lose-house-2014-larry-kudlow> accessed on January 28, 2013.

[4] Ron Paul, “The coming debt limit drama: Government wins, we lose,” Congressman Ron Paul, Texas Straight Talk, January 21, 2013, < http://the-free-foundation.org/tst1-21-2013.html> accessed on January 28, 2013.

[5] Ibid.

[6] George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer, and John B. Taylor, “Start Now,” Hoover Digest, 2013 No. 1, January 25, 2013, Hoover Institution, <http://www.hoover.org/publications/hoover-digest/article/138196> accessed on January 28, 2013.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Michael D. Tanner, “Obama’s Inaugural challenge to Republicans,” January 23, 2013, Cato Institute,

< http://www.cato.org/publications/commentary/obamas-inaugural-challenge-republicans> accessed on January 28, 2013.

[13] David Malpass, “The U.S. needs to win the battle to limit government now,” Forbes, January 23, 2013, <http://www.forbes.com/sites/currentevents/2013/01/23/the-u-s-needs-to-win-the-battle-to-limit-government-now/> accessed on January 28, 2013.

[14] Patrick J. Buchanan, “The old republic and Obama’s America,” Creators Syndicate, January 25, 2013, < http://www.creators.com/conservative/pat-buchanan/the-old-republic-and-obama-s-america.html> accessed on January 25, 2013.