Sunday, March 7, 2010

Obama budget will add $9.7 trillion to the national debt over next decade

It is mind-numbing what passes under the news radar these days on a Friday afternoon. From the Washington Post:
President Obama's proposed budget would add more than $9.7 trillion to the national debt over the next decade, congressional budget analysts said Friday. Proposed tax cuts for the middle class account for nearly a third of that shortfall.

The 10-year outlook released by the nonpartisan Congressional Budget Office is somewhat gloomier than White House projections, which found that Obama's budget request would produce deficits that would add about $8.5 trillion to the national debt by 2020.

The CBO and the White House are in relative agreement about the short-term budget picture, with both predicting a deficit of about $1.5 trillion this year -- a post-World War II record at 10.3 percent of the overall economy -- and $1.3 trillion in 2011. But the CBO is considerably less optimistic about future years, predicting that deficits would never fall below 4 percent of the economy under Obama's policies and would begin to grow rapidly after 2015.

Deficits of that magnitude would force the Treasury to continue borrowing at prodigious rates, sending the national debt soaring to 90 percent of the economy by 2020, the CBO said. Interest payments on the debt would also skyrocket by $800 billion over the same period.

Obama's tax-cutting agenda is by far the biggest contributor to those budget gaps, the CBO said. As part of his campaign pledge to protect families making less than $250,000 a year from new taxes, the president is proposing to prevent the alternative minimum tax from expanding to ensnare millions of additional taxpayers. He also wants to make permanent a series of tax cuts enacted during the Bush administration, which are scheduled to expire at the end of this year.

"Over the next 10 years, those policies would reduce revenues and boost outlays for refundable tax credits by a total of $3.0 trillion," wrote Douglas W. Elmendorf, the CBO director. Combined with interest payments on that shortfall, the tax cuts account for the entire increase in deficits that would result from Obama's proposals. (emphasis added)
Refundable tax credits is a politically correct way of saying income tax welfare for people who don't pay income taxes.  The net result will be a shrinking tax base.  Connie Madon at BloggingStocks explains:
According to estimates by the Tax Policy Center, nearly half of households -- 47%, or 71 million -- will pay no federal tax. Why is number so high? The answer lies in the myriad refundable tax breaks. And the number has risen since the enactment of the recent $787 billion stimulus package.

The great majority of households making under $30,000 fall into this category. Here is a breakdown by income:

Half of households making between $30,000 and $40,000 will pay no taxes.

Some 22% of those making $50,000 to $75,000 will pay no taxes.

And 9% of households with incomes between $75,000 and $100,000 will not pay taxes.

We must keep in mind that these numbers exclude weekly payroll deductions. When that number is factored in, only 24% of households will have a net tax liability of zero.

There will be a big brouhaha in Congress when the repeal of the Bush tax cuts come up for renewal. President Obama wants to increase taxes for those making over $200,000. He wants to extend the Bush tax cuts for everyone except high-income earners.

Underlying these numbers is a greater problem: the tax base is shrinking. That means less federal income, and therefore the need to find new sources of revenue.
A shrinking tax base in a sluggish economy with a growing entitlement class and a projected national debt of 90% of GDP by 2020.  What could possibly go wrong?

1 comment:

  1. Everything Obama learned about diplomacy he learned in kindergarten and it is us, the Americans who are paying for him not learing good lessons in the childhood. Hope his putting America on the path of "set a good example and others will follow" philosphy works!