The truth about Obama's tax fake out

Americans must be confused. For years President Obama has promised that raising taxes on the wealthy would solve our budget problems. Making the rich pay “a little more,” as Mr. Obama has repeatedly promised, was supposed to reduce our deficits – a goal embraced by most Americans.

But now the president has signed a bill which finally raises taxes on the wealthiest Americans -- and it turns out we will continue to rack up deficits for the foreseeable future. In fact, the plan adds $329 billion to this year’s deficit alone.

Further out, this agreement will do almost nothing to slow the dangerous erosion of our nation’s financial strength;  projected ten-year deficits of $7.9 trillion will be whittled down by $650 billion as the wealthy, by the way, pay not “a little more,” but quite a lot more.


On top of a hike in rates from 35% to 39.6%, the wealthy will also see deductions phased out, will be paying new surtaxes on investment income to fund ObamaCare and Medicare as well as higher rates on investment income. In addition, several states, including California, have passed new taxes on those in the top income brackets.

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In a still-struggling economy, this approach may make sense, in that no other group can afford higher taxes. But, raising taxes on any Americans could carry hidden penalties; our highest-earners normally account for some 40% of consumer spending but in this slow-growth period, that slice has expanded to about 50%.

Jacking up taxes on the rich risks further undermining our tepid recovery. Indeed, early indications suggest that the threat of higher taxes caused the wealthy to cut back on holiday spending, leading to a lackluster retail season.

Voters may also be mystified that President Obama, who as recently as New Year’s Eve reiterated his commitment to a “balanced” approach to reducing our deficits, has signed a bill that cuts spending by $15 billion, while boosting tax revenues by $620 billion. That ratio of 44:1 tax hikes to spending cuts doesn’t sound very balanced.

Equally puzzling, President Obama pledged to prevent a tax increase on most Americans. But – surprise - surprise - the Tax Policy Center reports that 77% of U.S. households will pay higher taxes this year, thanks to the expiration of the two percentage-point payroll tax holiday.

Hard pressed, voters might wonder about other claims made recently by their president. For instance, he has on numerous occasions boasted that he has cut spending. And yet, for the first two months of this year, federal spending jumped a whopping 16%. Even adjusted for some timing issues, spending was 4% higher for October and November than it was last year – and still growing considerably in excess of inflation.

Note to voters: Obama’s “cuts” are always made from a hypothetical spending line which points inexorably north. It’s a little like the wife who claims to have saved her husband money by buying three new handbags, instead of four.

Americans are still waiting for President Obama to take up the harder challenge of trimming so-called “entitlement” programs, which claimed 62% of the federal budget in fiscal 2012. As he campaigned for office in 2008, Mr. Obama pledged to “take up entitlement reform quickly”  -- certainly in his first term in office.

In 2009, he explained this necessity, saying that the “real problem with our long-term deficit actually has to do with our entitlement obligations.”

He’s right. Social Security, Medicaid and Medicare alone now account for 44% of all federal spending. When ObamaCare is added in, the four programs will sap about 18.5% of GDP by 2050, according to the Heritage Foundation – or roughly the same portion historically claimed by all government functions.  That is, every other spending need, from defense to education, will be paid for with borrowed money. (Some analysts project this will occur by as soon as 2025.)

Entitlement spending has more than doubled in the past two decades, driving deficits higher. Here’s why: the Urban Institute reports that a couple in which both people earn an average wage will pay $116,000 in Medicare taxes over their lifetime, and receive $351,000 in payments. As the country ages, this is a seriously losing proposition for the nation. For the individuals receiving those benefits, it’s heaven-sent.

During the election, we were supposed to debate this problem. The nomination of budget savant Paul Ryan as the GOP vice presidential candidate was meant to thrust the issue to the forefront; instead, both Republicans and Democrats found entitlement reform simply too toxic, and it was dropped, along with Paul Ryan.

The country should now look towards President Obama for leadership in setting our country on a sustainable course. He must re-up his earlier pledge “to cut the deficit we inherited in half by the end of my first term in office.” It is clear that raising taxes on the rich will not alone do the trick.

Astonishingly, the one approach that might actually move the needle in the right direction – boosting economic growth – is hardly mentioned. This White House discredits the potential power of the private sector unleashed; that has been, and will continue to be, President Obama’s greatest handicap. It is also the number one reason that voters made a terrible choice this past November.