Elephants and the Fiscal Cliff

Dec 13, 2012 by

tax_hikeTaxmageddon will amount to $494 billion in tax hikes; this will be the largest tax increase in history! 

by Henry W. Burke

12.12.12

Much attention is rightly focused on the fiscal cliff negotiations in Washington.  This is understandable when one considers the huge tax hikes that could hit on January 1, 2013.

The so-called fiscal cliff is the combination of the nearly $500 billion in tax hikes (“Taxmageddon”) and the mandatory federal spending cuts (“sequestration”).  If the White House and Congress fail to act, we will reach the dreaded fiscal cliff on January 1, 2013.

Taxmageddon will amount to $494 billion in tax hikes; this will be the largest tax increase in history!

On an individual level, average taxpayers will see their taxes increase by about $2,000 to $4,000 next year!

The Budget Control Act (BCA) contained an Obama Administration-proposed procedure, called “sequestration,” that would automatically slash $1.2 trillion in spending starting January 2, 2013.

Half of the cuts are to come from national defense and the other half will come from non-defense items.  Even though defense represents only 18 % of total federal spending, it has been targeted for a disproportionate share of the cuts.  Under Sequestration, defense will experience a 10 percent reduction, jeopardizing our national security in the process.

“Elephants” typically characterize Republicans and “donkeys” denote Democrats.  Right now, the elephants and donkeys are butting heads near the fiscal cliff, with the outcome very much up in the air.  Obama is harping about increasing taxes on the rich (the “wealthiest 2 percent”).  Even though the election is over, he continues to campaign on this point.

Obama included these class warfare taxes in his failed budget attempts; Democrats and Republicans alike shunned the toxic issue.  The 2012 Budget that Obama submitted to Congress last year was soundly defeated in the Senate by a 97 to 0 vote!  His 2013 Budget, which included numerous recycled tax hikes, suffered a similar fate.  Obama’s 2013 Budget was defeated unanimously in the House 414 to 0!

Will Obama’s tax increases lower the deficit?  It is estimated that Obama’s tax hikes on the so-called “rich” (individuals with incomes more than $250,000) will generate about $80 billion per year (at best).  The federal government spent $3.5 trillion in Fiscal Year 2012 (ending September 30, 2012).  This equates to about $9.7 billion per day.  At our current rate of spending, this tax increase on the rich will pay for only 8.5 days of federal government spending.

Obama’s demands for more revenue are not an economic policy or a budget policy; rather, the demands express his vision of social justice and income redistribution.  (Remember “Joe the Plumber?”)

Obama has recently upped the ante significantly for raising taxes; he is now calling for $1.6 trillion in higher taxes over 10 years.  To get to the $1.6 trillion figure, Obama is including more than the Bush tax cuts.  Presumably, he is talking about some all-new tax hikes, tax increases on the middle class, resumption of the death tax, and an assortment of other tax increases.

In the fiscal cliff negotiations, Obama is insisting on punishing the successful high-income taxpayers.  This is a side show in a three-ring circus.  His focus is on making the rich pay more when the attention should be on cutting government spending.  Washington does not have a revenue shortage; rather, it has a spending problem.

There is an old saying — “The person who frames the argument wins the argument.”  Obama has successfully framed the fiscal cliff debate as a decision about tax rates.  Where is spending in this discussion?  Unless conservative Republicans can refocus the attention toward reducing spending, they will lose the fiscal cliff negotiations.

Speaker of the House John Boehner understands the damaging effects of tax increases and wants to turn the focus on spending cuts.  On 11.28.12, Boehner urged his House colleagues not to waver from their position to keep tax rates frozen.  Boehner stated:

          We’re fighting for spending cuts. We’re fighting against increases in tax rates that destroy jobs. And we’re fighting for pro-growth tax reform and entitlement reform, the keys to economic growth.

http://www.politico.com/news/stories/1112/84321.html#ixzz2DX6uoJQ0

Obama has offered almost nothing in terms of spending reductions.  Accounting tricks such as “baseline” budgeting do not count as real spending cuts.  Likewise, how can Obama include so-called savings from ending the wars in Iraq and Afghanistan?  America needs real spending cuts not budgeting shenanigans.

Fiscal Cliff Bogus Budget Tactics

The fiscal cliff debate might result in some unintended consequences.  The elected officials are trying to tie a near-term resolution to a sweeping deficit reduction plan.  If history is a judge, we may end up with higher taxes and more spending.

Congress and the White House could harm the country through gimmicks and bogus budget cuts that create so-called “savings.”  The Heritage Foundation warned that lawmakers should avoid these five budget tactics:

1.  Phantom War Savings

The largest and worst practiceclaims savings from purely artificial budget conventions.  Obama’s budget sets a baseline as if the wars in Iraq and Afghanistan are ongoing.  Against this “baseline,” Obama claims a “savings” of $834 billion over 10 years.  (CBO Director Douglas Elmendorf rejected this tactic in February.)

Obama’s budget takes these phantom savings a step further and diverts $210 billion to new transportation funding

2.  Spend Now, Save Later

This time-honored practice spends money up front with the promise of cutting spending later.  Obama employed this practice in his recent fiscal cliff proposal.  Along with his $1.6 trillion, 10-year tax hike, Obama hinted at up to $400 billion in mandatory savings over 10 years, but he offered no specifics.

3.  Other Bogus Baseline Savings

One way to hide increased spending is through a mechanism called “changes in mandatory programs” (CHiMPs).   Because the common CHiMP applies for just one year at a time, the “savings” disappear in the next year while the higher spending remains.

 

4.  Recissions that Do Not Save Money

 

In 2013, sequestration will be applied by cancelling existing budget authority, a practice called “rescission.”  Like the illusory war savings described above, this tactic claims to save money that was never going to be spent.  Nevertheless, the savings are another mirage.  Congress should discard this practice as well.

 

5.  “Emergencies” and Other “Adjustments”

 

Another way Congress can excuse higher spending is by designating certain funding as an “emergency” or providing “adjustments” to spending limits for disaster assistance.  Obama has already sought to exploit both loopholes by requesting $60.4 billion (without offsets) for Hurricane Sandy relief.

 

 

Credibility Counts

Congress has not adopted a budget in almost four years, although the House did pass Budget Resolutions in 2011 and 2012.  Spending and tax policies have been piecemeal and haphazard.  The Heritage article concluded by offering these wise comments:

          Credibility counts. To earn the confidence of financial markets and the American public—as well as starting the government toward a sustainable fiscal course—any plan to replace the coming sequestration should be sound, free of gimmicks, and built with policies that achieve real savings.

 

http://www.heritage.org/research/reports/2012/12/fiscal-cliff-5-budget-gimmicks-to-reject

 

 

 

Current Picture of the Federal Government

 

We cannot tackle the fiscal cliff issue unless we have a good understanding of the federal budget.  The two major aspects of the federal budget are Revenue (Receipts or Taxes) and Spending (Outlays or Expenses).  For Fiscal Year 2012 (which ended September 30, 2012), the figures are as follows:

 

 

 

Revenue and Spending for Fiscal Year 2012

(Billions of Dollars)

 

 

Description

Actual 2012

Amount

($ Billions)

Percent

of GDP

Revenue    
Individual Income Taxes     1,132  
Social Insurance Taxes        845  
Corporate Income Taxes        242  
Other        230  
    Total Revenue     2,449    15.8 %
     
Spending — Total     3,538    22.8 %
     
Deficit     1,089     7.0 %

 

 

Source: CBO Monthly Budget Review, 11.07.12

 

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43698-Nov-MBR.pdf

 

 

 

 

The federal government spent $3,538 billion ($3.538 trillion) in FY 2012; the federal government took in $2.449 trillion (revenue from taxes).  This means that the budget deficit for this year was $1.089 trillion.  In simple terms, the government spent $1.1 trillion more than it took in from taxes.

[$3.538 trillion – $2.449 trillion = $1.089 trillion deficit]

 

 

 

However, the “Real Deficit” for the year was $1.276 trillion.  On September 30, 2011, the national debt was $14.790 trillion; by September 30, 2012, the national debt had grown to $16.066 trillion.  In the 12-month period from October 1, 2011 to September 30, 2012 (FY 2012), the national debt grew by $1.276 trillion.

[$16.066 trillion – $14.790 trillion = $1.276 trillion]

 

 

 

 

The national debt (Total Public Debt Outstanding) on 9.30.12 (9.28.12 given) was $16.066 trillion.  For this date, the Debt Held by the Public was $11.269 trillion and Intragovernmental Holdings was $4.797 trillion.

[Debt Held by the Public + Intragovernmental Holdings = Total Public Debt Outstanding]

[$11.269 trillion + $4.797 trillion = $16.066 trillion.]

 

 

 

A national debt of $16.1 trillion represents 103% of GDP.  Our country is in real trouble!

 

 

 

 

 

During Obama’s term in office, the national debt has exploded, going from $10.6 trillion to $16.4 trillion in 47 months (an increase of $5.7 trillion).

 

Growth of National Debt Under Obama

(Trillions of Dollars)

 

 

Date

Debt Held

by the

Public

($ Trillions)

Intragovernmental

Holdings

($ Trillions)

Total Public Debt

Outstanding

($ Trillions)

Growth of Debt

During Term

($ Trillions)

  1.20.09     6.307    4.320     10.627       —
12.10.12   11.575    4.795     16.370     5.743

 

 

http://www.treasurydirect.gov/NP/NPGateway

 

 

 

 

How about federal spending?  In Fiscal Year 2012 (which ended 9.30.12), spending was as follows:

 

 

 

Total Spending in Fiscal Year 2012

(Billions of Dollars)

 

 

 

Major Category

FY 2012

Amount

($ Billions)

Percent

of Total

Defense – Military       651     18 %
Social Security Benefits       762     22 %
Medicare       469     13 %
Medicaid       251       7 %
Unemployment Benefits         96       3 %
Other Activities    1,022     29 %
    Subtotal    3,251     92 %
     
Net Interest on Public Debt       258       7 %
TARP         24       1 %
Payments to GSEs           5       —
      Total Spending    3,538   100 %

 

 

Source:  CBO Monthly Budget Review, 11.07.12

 

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43698-Nov-MBR.pdf

 

 

 

The primary driver of spending is clearly the major entitlement programs: Social Security, Medicare, and Medicaid.  Together, they comprise 42 % of federal spending.

 

 

Another huge category is means-tested welfare, one of the largest areas in the budget.  In FY 2011, the 79 federal welfare programs totaled a whopping $746 billion!

 

 

 

 

The Welfare Elephant

 

Welfare spending is the proverbial elephant in the room.  How can politicians ignore the biggest element in the federal budget?  When the federal government is running record deficits above $1 trillion each year, the elected officials should be targeting the major drivers of federal spending.

 

 

Our country has spent huge sums of money on welfare over the years.  Since the War on Poverty began in the 1960s, the government has spent $19.8 trillion (inflation-adjusted) to fund a growing list of welfare programs.  Robert Rector, Senior Fellow at The Heritage Foundation, deduced, “This is nearly three times the cost of all military wars in U.S history from the Revolutionary War through the current war in Afghanistan.

 

 

http://budget.house.gov/UploadedFiles/rectortestimony04172012.pdf

 

 

 

Total means-tested welfare spending (federal and state) has been doubling each decade, going from $0.47 trillion in the1969-1978 decade to a projected figure of $10.3 trillion in the 2009-2018 decade.

 

 

 

http://www.heritage.org/research/reports/2010/06/confronting-the-unsustainable-growth-of-welfare-entitlements-principles-of-reform-and-the-next-steps

 

 

 

Welfare spending has been the fastest-growing part of government spending for the past two decades.  For the Fiscal Year 1989 to FY 2008 time period, the percentage increase in annual spending has been:

 

 

Percent Increase in Annual Spending

(FY 1989 – FY 2008)

 

Program

Percent

Increase

Means-tested Welfare + 292 %
Social Security & Medicare + 213 %
Education + 143 %
Defense + 126 %

 

 

 

Here is the zinger: During Obama’s three years in office, he has increased welfare spending 3 times faster than prior welfare increases.

 

 

 

 

Welfare spending has overtaken every other category, including Social Security, Defense, and Medicare. (Medicaid, of course, is a big part of welfare spending.)  At $770 billion, welfare represents the largest budget category today and it will continue to grow unless Congress and the White House find a way to tame the welfare monster.

 

 

 

Spending for means-tested welfare has exploded under Obama.  In Fiscal Year 2008, the federal government spent $563 billion on welfare.  Welfare spending in 2009 was $692 billion; welfare spending in 2010 was $733 billion; and welfare spending in 2011 was $746 billion.  Final figures are not available for 2012 but welfare expenses will likely total about $770 billion for this year (FY 2012).

 

 

In Obama’s four-year term, welfare spending has jumped $207 billion (a 37 % increase in four years).

[Source: Congressional Research Service, 10.16.12 Letter to Senate Budget Committee]

 

 

 

 

 

 

 

CONCLUSION

 

The clock is ticking on the massive tax hikes embedded in the fiscal cliff.  America must not succumb to this politician-caused economic catastrophe.  Obama offered an absolutely outrageous fiscal cliff proposal!  As expected, his proposal is long on class warfare and budgetary gimmicks but short on spending reductions.  Obama even had the gall to request a blank check on raising the debt ceiling.

 

It appears that the Republicans might cave on tax increases and not push hard for entitlement reform.  Welfare spending, the largest area of our budget, may not even enter the discussions.  Based on what we know, the Republican position is weak and unacceptable.

 

A future awaits with fewer jobs and lower incomes at the bottom of the fiscal cliff.  That bleak future can also follow from poorly designed fiscal cliff avoidance policies.  America is losing its capacity to achieve sustained economic growth and jobs.

 

Hopefully, the Congress and the White House understand that the fiscal cliff negotiations are extremely important for our economic survival.  Our country and our economy will pay the price if we get this wrong.

 

 

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Bio for Henry W. Burke

 

 

Henry Burke is a Civil Engineer  with a B.S.C.E. and M.S.C.E.  He has been a Registered Professional Engineer (P.E.) for 37 years and has worked as a Civil Engineer in construction for over 40 years. 

 

Mr. Burke had a successful 27-year career with a large construction contractor. 

 

Henry Burke serves as a full-time volunteer to oversee various construction projects. He has written numerous articles on education, engineering, construction, politics, taxes, and the economy.

 

 

Henry W. Burke

E-mail:  hwburke@cox.net

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