Obama's Budget -- What Was He Thinking?

With the usual Beltway fanfare, President Obama released his FY 2011 budget this morning. What does it say about where the country is going under the Obama-Pelosi-Reid leadership? What’s going to happen with taxes? Has the president learned any lessons from his party’s electoral defeats in November and January?

Let’s start with the basics. Historically (meaning, since 1960 or so), federal taxes have averaged about 18 percent of our economy. Spending has averaged about 21 percent. The result has been an average deficit of 3 percent of gross domestic product (GDP). That basic framework has been the story of U.S. budgets from JFK, to Nixon, to Reagan, to Clinton, to Obama.

ometimes, these numbers jumped around (higher spending under Carter, higher taxes under Clinton, etc.), but this has been the gravitational pull that we seem to keep coming back to.
Under the Obama budget, taxes are scheduled to rise from 14.8 percent of GDP in 2009 to 19.6 percent of GDP in 2020 (higher than the historical average of 18 percent). Spending is scheduled to fall slightly from 24.7 percent of GDP in 2009 to 23.7 percent in 2020 (much, much higher than the historical average of 21 percent of GDP). The national debt will hit over 77 percent of our economy in 2020, which would be the highest level since 1950, when we were paying off World War II.

What does all that tell us? It says that the budget deficit is not caused by a deficiency of tax revenue. Taxes are expected to be higher—substantially higher—than their historical average. Rather, the budget deficit is a spending problem. Spending is far higher than its average of 21 percent of GDP throughout the budget window. If you are concerned about the deficit, you only need to look to one side of the budget ledger. Spending is out of control. That has led to spiraling deficits and debt without end.

President Obama hasn’t gotten that message, or at least, if he has, it doesn’t show up in the budget. Rather than enacting meaningful spending program reforms that would bring federal expenditures back to their late-Clinton levels, he puts forward minor spending restraint gimmicks. His spending cuts section comes out to less than one-tenth of one percent of federal spending per year. Even worse, many of his spending reductions are actually tax increases on oil and gas companies.

Nor does President Obama seem to think that taxes are already high enough. His proposals for new tax increases take up several pages of tables. Victims include large U.S. employers with overseas operations, life insurance companies, energy companies, profitable small businesses (since they pay taxes at the individual level, and tax rates are rising for households earning at least $250,000 per year), and a whole host of others. A thinking person might have thought with 10 percent unemployment, sluggish economic growth, and a grassroots revolt about the size and scope of government would have stopped this madness. Sadly, it hasn’t.

Now attention shifts to the Congress. It’s ultimately going to be up to them. Our lawmakers will ultimately decide which tax hikes will go through at the end of the year. They decide which new taxes are going to become law to pay for unionized ditch-digging and other “stimulative” activities. They appropriate the money. Congress—not the president—will have to answer to the American people in the fall. If they give the same big government pitch that Creigh Deeds, Jon Corzine, and Martha Coakley did, there may be a very different budget atmosphere in Washington next year.

Ryan Ellis is tax policy director of Americans for Tax Reform.