Wednesday, February 16, 2011

Undercover with the 2012 Budget

President Obama's proposed new $3.73 trillion budget will affect businesses, employees and even the unemployed. One of the outstanding features is its tax increases. The FY 2012 plan contains $1.5 trillion in new taxes over 10 years, in addition to those already paid under the current law. Here is a quick rundown.

Taxes in FY 2012 Budget (1)

• Raises the top marginal income tax rate (at which a majority of small business profits face taxation) from 35% to 39.6%. This is a $709 billion/10 year tax hike

• Raises the capital gains and dividends rate from 15% to 20%

• Raises the death tax rate from 35% to 45% and lowering the death tax exemption amount from $5 million ($10 million for couples) to $3.5 million. This is a $98 billion/ten year tax hike

• Caps the value of itemized deductions at the 28% bracket rate: This will effectively cut tax deductions for mortgage interest, charitable contributions, property taxes, state and local income or sales taxes, out-of-pocket medical expenses, and unreimbursed employee business expenses. A new means-tested phase-out of itemized deductions limits them even more. This is a $321 billion/ten year tax hike

• Adds new bank taxes totaling $33 billion over ten years

• Adds new international corporate tax hikes totaling $129 billion over ten years

• Adds new life insurance company taxes totaling $14 billion over ten years

• Adds new taxes on energy, including LIFO repeal, Superfund, domestic energy manufacturing, and many others totaling $120 billion over ten years*

• Increases unemployment payroll taxes by $15 billion over ten years

• Taxes management capital gains in an investment partnership (“carried interest”) as ordinary income: This is a tax hike of $15 billion over ten years

• Companies can no longer deduct the cost of punitive damages from a lawsuit settlement: This is a tax hike of $300 million over ten years

• Increases tax penalties, information reporting, and IRS information sharing: This is a ten-year tax hike of $20 billion.

*The WH budget also includes $120,000,000,000 in new energy taxes by 2021. The new budget repeals IRS Section 199, which grants deductions for companies who provide goods on American soil. The change applies only to energy companies and will cost $902 million in corporate income tax increases in 2012 for the oil and gas industry and $20 million for the coal industry. By 2021, the increases will total $18.4 billion. (2)

For It

Supporters suggest this is a good plan that cuts discretionary spending by 5% for 2012, increases 'green' jobs, the wave of the future, freezes job salaries, assists the poor and provides more money for higher education. (3) Benjamin Page, a faculty member at the Institute for Policy Research, suggests most people are worried about the economy, not the deficit. (4) While the deficit will rise to a record $1.6 trillion in 2012, Mr. Obama maintains he is taking a more reasoned surgical 'scalpel' approach to long-term reductions. (5) Added, over 10 years, Mr. Obama's much heralded cuts will come to a total of $400 billion. (6)

Against It

Opponents argue that, enthusiasm over the President's cuts is puzzling. Mr. Obama created discretionary debt of $373 billion more than recommended by his own debt commission. (7) Budget Committee Chairman Paul Ryan shows that the President's references to a 'freeze' are illusory. He points out spending increases every year for the next 10 years totaling $8.7 trillion and an addition of $13 trillion to the debt during the same period. (8) Under the Obama budget, rather than decreasing, the debt doubles in 5 years and triples in 10. (9)

Is Mr. Obama's plan good for the country or not? Perhaps the answer lies in the origin of the numbers.

The World of Numbers

In the political world, numerical conclusions are malleable. In January 2011, when the unemployment figures dropped from 9.8% to 9.4% percent columnists praised the turnaround, but insiders knew that people had stopped job searching and slipped off the stats. (10)

CBO figures would support or pan healthcare costs based, not on the math, but on the assumptions behind the math. The bill that once was necessary to reduce the budget, will now add at least $226 billion to the debt and that number keeps rising. (11) The reason for the divide? According to Douglas Holtz-Eakin, former CBO Director, the authors of the Affordable Care Act riddled the cost projections with "manipulated revenues," "unrealistic annual Medicare savings," "stolen revenues from Social Security" and double counting of savings, to name a few. (12)

Close review of FY 2012 budget reveals similar artful tactics. The "Bridge from Budget Enforcement Act Baseline to Adjusted Baseline" establishes a "Budget Enforcement Act Baseline" of $5.5 trillion over the next 10 years. When you add in program adjustments, "indexing to inflation the 2011 parameters of the Alternative Minimum tax" and numerous projections, the baseline jumps to $9.39 trillion in 10 years. (13)

In other words, the budget baseline was so bloated with vanishing costs that the savings appear to be greater than they are. One assumption was that the 'one-time stimulus' package is now a permanent fixture. Another posits that surge levels in Afghanistan and current troop levels in Iraq will remain constant for 10 years, even though we have already announced withdrawal times. (14)

This is like having an unaffordable personal annual debt of $10,000. One year you irresponsibly increase it to an unaffordable $20,000. Your solution is to project future debt based on $20,000 annually and add in additional rising costs so that in 10 years you owe say $300,000. You then eliminate $30,000 of projected expenses and brag to your partner of your cost-cutting prowess.

Mr. Obama also mentioned discretionary spending cuts of 5%. (15) Indeed there are 211 cuts estimated to save $32 billion in 2012. There are cuts to the Home Energy Assistance Program and various community grants. (16) But to create the image of larger cuts, Mr. Obama redefined Pell grants as mandatory spending, reduced spending for Iraq and Afghanistan by $38.2 billion in 2012 (the same costs he just inflated) and reclassified $54 billion of surface transportation spending from the discretionary column to mandatory spending. (17) In other words, discretionary spending wasn't reduced, it was moved. When added back, these costs actually increase discretionary spending by $31 billion.

Tax Tricks

  • The President's budget raises the top tax rate on capital gains and dividends from 15% to 20%, but lists the move as a tax cut that reduces revenues by $124 billion over 10 years.
  • The 2012 budget proposes to extend the Bush cuts for low to mid income earners and correctly includes this in the revenue baseline. But, he then leaves the tax changes for the upper income individuals out of the baseline and thus conveniently fails to report the resulting tax hike.
  • The President's budget proposes to prevent the Alternative Minumum Tax from rising in 2012, but thenproposes a $321 billion tax hike to offset the cost of not letting the tax rise! (17)

What the World Needs Now

Budgetary tricks are not the purview of any party. However, when our nation is so dangerously in debt, with 30% of mortgages underwater (18) and the average duration of unemployment at record highs,(19) we need integrity not trickery.

Whatever value may reside in the President's budget is overwhelmed by the perfidy. Whatever your political persuasion, this budget deserves the shredder.

John A.


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