The Presidents Budget

Dr. Martin Regalia

A couple of months ago, the president unveiled his budget outline for the next 10 years. As is customary with a new administration, the proposal was not detailed, but it did provide the broad outline and goals for the new administration.

After reviewing the proposal, the U.S. Chamber sent a letter to Congress opposing the budget and urging Congress to "craft a budget resolution that will, first and foremost, get the economy out of its current malaise and back on track for future growth." The Chamber's response was certainly not a knee-jerk reaction but, rather, a reasoned response to a budget that calls for an enormous expansion of the federal government paid for, in large part, by a significant increase in taxes on businesses and higher income individuals.

Deficits and Debt 
Perhaps the best place to start is with an overview of the staggering size of this plan. According to the nonpartisan Congressional Budget Office (CBO), the president's proposal would create a deficit that exceeds 13% of GDP in 2009, remains more than 9.5% of GDP in 2010, never drops below 4% of GDP during the middle years, and would rise sharply by the end of the budget horizon. By contrast, the deficit in 2008 was 3.2% of GDP.

Government spending in 2009 would hit a whopping 28.5% of GDP and would still be 24.5% of GDP in 2019. Government revenues (primarily taxes) would grow from 15.4% of GDP in 2009 to almost 19% over the same period.

According to the CBO, the president's budget would in 10 years increase the amount of debt held by the public to more than $17 trillion from its $5.8 trillion level in 2008 and raise the debt-to-GDP ratio from just under 41% to more than 82%. As such, this administration would issue more debt than all 43 previous administrations combined.

Businesses Targeted for Tax Hikes
The president proposes to "pay" for most of the programs in his budget through a huge tax shift on businesses and higher income individuals. His proposal would take an already highly progressive tax system (the top 1% of the income distribution controls about 22% of income and pays almost 40% of federal income taxes) and turn it into a punitive system on those who save, invest, and create jobs.

The proposal includes a $353 billion tax increase on corporate businesses by, among other things, repealing long-standing accounting practices, double taxing the profits our multinational companies earn abroad, codifying the economic substance doctrine, levying punitive new taxes on the oil and gas industry, taxing the carried interest in partnerships, and reinstating Superfund taxes.

The proposed tax increases on upper income individuals that total more than $950 billion also hit our most successful small businesses that pay taxes as individuals, thus hindering their ability to grow and create jobs. These proposed increases include raising the top marginal tax rates, reducing or eliminating personal exemption and itemized deductions and limiting the rate at which the remaining deductions could be taken, and raising the tax rate on capital gains and dividends.

Taken together, these tax increases will discourage saving and investment and slow job growth at a time when the economy is mired in the steepest downturn since the Great Depression. Moreover, they will create a tax code that is so skewed that virtually half the taxpayers in the country will be excluded from paying federal income tax and thus have no interest in the way our government is run. Creating a new welfare state is not good public policy.

Massive Spending Initiatives
In addition to these direct income taxes, the president's budget proposes a massive new indirect tax on energy via the auction of carbon emission credits. This proposal was estimated by the administration to raise $646 billion over 10 years, but reputable private sources place the cost at two to three times that amount. It also includes substantial new fees on users of licensed spectrum that would endanger the continued viability of our nation's broadcasting system, which has always provided free over-the-air programming. For the wireless industry, these fees would be in addition to the more than $60 billion already spent purchasing spectrum in government auction. These new fees divert funds that could otherwise be invested in network infrastructure.

The president's proposal also establishes a $634 billion health care initiative that contains no details on spending but is funded by tax increases and cost shifts. Moreover, this amount is less than half of what health care reform is likely to cost over 10 years.

The proposed budget for the Department of Labor seeks to increase enforcement for the various laws administered by the department at the expense of a balanced approach, including compliance assistance to small businesses and other employers looking for guidance on meeting these detailed and complex requirements.

The budget proposal also seeks to build on Unemployment Insurance (UI) "modernization" reforms included in the stimulus package. The most objectionable reform provides incentive funds to states that permit individuals to claim and receive unemployment compensation for "separation" from work "for a compelling family reason." Traditionally, UI benefits have been available only to those who have lost their jobs through no fault of their own and are making efforts to find work.

Transportation Investment
The president's budget proposes a scorekeeping change that essentially merges the highway, transit, and aviation programs with the discretionary budget and could result in program reductions to increase spending for other discretionary categories. This action would create uncertainty for multiyear capital investment programs and could hamper investment in equipment and materials, thus slowing job creation.

The Chamber urges Congress to ensure that the fiscal year 2010 budget provides a framework for increased transportation investment and keeps the Highway Trust Fund and the Airport and Airway Trust Fund separate and distinct from discretionary spending. With the reauthorization of federal highway, transit, and aviation programs pending this year, it is also important to ensure that the budget includes mechanisms such as a reserve fund to provide the necessary flexibility to accommodate future funding increases.

An Overly Rosy Scenario
As if all this was not bad enough, the entire budget is based on overly optimistic assumptions. The budget's economic assumptions present a rosy scenario that assumes the economy will only decline by 1.2% in 2009.

By contrast, the consensus of Blue Chip forecasters is that growth will decline by 2.6%. In 2010, the budget assumes growth rebounds at a 3.2% rate. The Blue Chip consensus only expects growth of 1.8%. Looking farther ahead, the budget assumes growth will average 4.3% for three years between 2011 and 2013 before returning to trend. In the past 20 years, there have only been five years of comparable growth, and three of those occurred during a massive productivity surge and the tech bubble in the late 1990s.

The situation is even worse when we look at the unemployment rate. The administration's budget unrealistically assumes that the unemployment rate will only rise to 8.1% in 2009 and then decline to 7.9% in 2010. The unemployment rate is currently 8.5% and is expected to rise to nearly 10% in 2010.

The forecast for inflation is similarly unrealistic. Despite trillions of dollars of stimulus and credit extended to the banking sector, the administration assumes that the inflation rate never exceeds 2.1%.

In general, this administration's budget proposal focuses on many important longer-run issues but loses sight of the most immediate concerns presented by the current severe weakness in the economy. The spending proposals are broad and pervasive but in many cases undefined and unfunded or underfunded. The tax provisions are simply the wrong medicine at the wrong time.

The Chamber urged Congress to reject the president's budget and craft a budget resolution that focuses on getting the U.S. economy growing again because only a vibrant, growing economy will provide the resources to tackle issues of importance to the American public.

The good news is that the president's budget is not law; it is merely a statement of the administration's goals. Congress ultimately decides what does and does not end up in the budget. As I write this, the House and Senate have both passed budget resolutions. While these budget resolutions follow the same broad guidelines as that offered by the president, such as providing for middle income tax relief and AMT relief, they omit several of the president's priorities, including the Making Work Pay credit and a revenue raiser that would cap itemized deductions at 28% for certain high-income taxpayers. By the time you read this, we should know more about Congress' approach-but a discussion of those issues must wait for a later article.