Obama’s Budget: A Closer Look
There’s a terrific interactive chart on the NY Times online today that is worth a look and some thought. There has been much discussion about “out of control spending” and the scariness of the budget numbers but it’s very interesting to take a look at the breakdown of budget components to see just how little room there is for maneuver. Here’s how the money is allocated (in billions):
- Medicare $498
- Health (including Medicaid)Â $355
- Social Security $738
- Income Security (including unemployment insurance, food stamps, etc) Â $560
- National Defense $738
- Veterans Benefits $125
- Net Interest $251
- Other $425
- TOTALÂ Â $3.69 TRILLIONÂ
Among these numbers there are enormous commitments that can’t be touched. Mandatory spending controlled by existing laws and not subject to the annual budget process includes all of Medicare, most of Medicaid, net interest, Social Security, most income security, a chunk of VA benefits, and parts of the areas considered “discretionary” including elements of agriculture, transportation, education, etc… Last I read, the amount of the budget that is actually subject to the budget process is about $1.4 billion; but the great bulk of that money is already committed to programs that we’re not going to eliminate – adjust yes, but eliminate no. Fully half of that “discretionary” spending is for Defense so that leaves $700 billion. If you want to break this down further I encourage you to go to the NY Times chart and click on the blue button “Show Mandatory Spending” and then you can highlight the areas that remain…very interesting.Â
It is this issue that forces me to return to the requirement to consider taxes as part of the equation for dealing with the budget deficit. Obama’s projections of a smaller deficit in years ahead rests on a very suspect assumption of nearly 4% annual economic growth. While we just saw 5.7% growth last quarter, that number reflects enormous inventory adjustments which are not sustainable and clearly job growth is non-existent. Obama’s first step in freezing certain spending growth is a reasonable one projected to save $250 billion over 10 years – a decent start though small in relation to the deficit itself. House Dems are already protesting the cuts to certain cherished programs and the GOP criticizes the cuts as too little too late. Both sides don’t like it – so I like it just that much more. Further, Obama proposes the establishment of a bipartisan commission to make recommendations designed to bring the budget deficit down to 3% of GDP by 2015. The GOP adamantly opposes the commission considering it, sight unseen, as a Democratic attempt to deflect criticism and responsibility while introducing new taxes. My view here, as I’ve said before, is that both sides need to accept that political gridlock, with Republicans refusing all new taxes and Democrats protecting all social spending programs, is fiscal suicide for the US. A bipartisan commission will give BOTH sides the political cover necessary to take uncomfortable steps needed for the long-term viability of the economy. The GOP cannot continue to be the party of no and the party of “tax cuts or bust” and the Dems cannot be the party of tax and spend or we’re all screwed. It’s incredible to me that this message is not getting into the mainstream conversation. Obama has tried this but the majority and minority leaders are tone deaf. They are focused only on the politics of decision-making and not on the necessity to act.Â
I can’t really comment much on budget cuts and what is or isn’t appropriate. Our defense budget in the midst of two wars, ongoing tensions with Iran and North Korea, and more is hardly worth discussing. There are certainly politically protected programs that seem more important to state economies than to national defense and I’d like to see a more determined effort to address those. Maybe we can do with one less aircraft carrier or do without a new generation of fighters but I’m in no position to comment on those issues. Either way, now seems hardly the time to take a chunk out of defense.Â
On the tax side I’ve already mentioned a few ideas here that are in the public domain some of which I think make sense and others I don’t. However, in going through the budget process I decided to take a closer look at the revenue side of Medicare, Medicaid, and Social Security since this is where the cost side is exploding. A quick refresher on how those taxes work:Â
The Social Security tax withheld from employees during the year 2010 will be 6.2% of the first $106,800 of each employee’s taxable earnings. The employee’s earnings in excess of $106,800 are not subject to the Social Security tax. In addition to the Social Security tax, the entire amount of each employees’ taxable earnings is subject to the Medicare tax of 1.45%.Â
Both the Social Security tax and the Medicare tax must be matched by the employer. This means the employer must remit to the federal government 12.4% of each employee’s first $106,800 of taxable earnings plus 2.9% of each employee’s earnings regardless of amount.Â
OK, so if you earn $50,000 you pay $3100 Social Security and if you earn $106,800 you pay about $6620. But if you earn $1 million you also pay $6620. Doesn’t anybody have a problem with that? I’m not suggesting we make the 6.2% tax payable dollar for dollar with income (and I’m definitely not suggesting that business be required to match every additional dollar paid) but isn’t there a means here of increasing revenue fairly? Maybe we max out the top rate at double the current rate ($213,600) but do not require business to match anything above the current rate? Maybe we impose a rate of 2% for each additional $100,000 income until any given person has paid twice the current max amount of $6620 (so a total maximum Medicaid withholding of $13,240 which would occur at an income level of $437,800)? There are plenty of variations on this theme and each would raise different amounts but I find something inequitable about the current formula especially given the looming SS deficit.Â
What about the Medicare tax of 1.45% on all incomes with no upside
limit? OK, here’s my problem: we aren’t taking in enough money to pay for Medicare. Take a look at this chart from a writer at the American Enterprise Institute:
Look at this as a business – any business. Your expenses are greater than revenues and your costs are increasing at a greater rate than your revenues. Everybody loves and wants your product. Demand is enormous and growing but you’re bottom line is bleeding and getting worse every year. You have three choices, right? Raise prices, reduce services, or declare bankruptcy. Medicare is sacred and any politician who suggests cutting services is committing political suicide. Cutting services = “death panels” so obviously that’s not happening. There HAS to be an answer here because the status quo is unacceptable – and at least part of it has to be on the tax side. It seems to me the logic here is inescapable.Â
I don’t know what the numbers are but at some point we need to see an increase in the Medicare tax from 1.45%. The Senate health care bill actually introduced an increase in this tax from 1.45% to 2.35% for those above the $200,000/250,000 threshold and it was estimated to raise $87 billion over 10 years (I don’t know if companies had to match). There was also some discussion of introducing this tax on investment income for higher income individuals. This also strikes me as a reasonable approach. I know many of you don’t care for taxes of any kind but that mindset is counterproductive to making a dent of any kind in our looming and growing budget deficits — especially on the health care front. We need to find revenue niches and this strikes me as an obvious one – health taxes to finance health deficits.
“Both sides don’t like it – so I like it just that much more.”-Mike
I agree wholeheartedly!
“OK, so if you earn $50,000 you pay $3100 Social Security and if you earn $106,800 you pay about $6620. But if you earn $1 million you also pay $6620. Doesn’t anybody have a problem with that?”
-Yes I DO, I’m sick of the sweating, toiling class having to carry the load.
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Too many numbers for me to wrap my hands around. As they say the devil is in the details. All new programs should be cancelled—such as high speed rail lines in FL. All pork should be banned by law. Cuts should be made in congressional pay, in all government employees who have gotten generous raises in this past year while those in the private sector have been cut. This would be a small step, but one that is needed to start. We must move toward smaller government and far fewer government workers.
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But you don’t understand, Ron. Obama wants everyone to be in public service. I guess that means every one will be a government worker.
Ron, one small thing about cutting Government workers. I was a construction engineer on highway construction projects. The state cut our budget to “save” money, so we had fewer construction inspectors. What happened? Contractor cheated because there was no government employee to check to see how much pavement was laid down.
Years went by and the roadway failed before this was realized. By then that contractor was defunct. In the end it cost the state more money.
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Thanks, Mike for breaking this down. It keeps the debate in the realm of reality-what we, as a country, spend- rather than in the political spectrum.
I have a bit of a knee-jerk reaction against charging wealthy income earners much more for SS.
“OK, so if you earn $50,000 you pay $3100 Social Security and if you earn $106,800 you pay about $6620. But if you earn $1 million you also pay $6620. Doesn’t anybody have a problem with that?”
Sure, but you don’t mention that if you earn a million dollars, there is a finite amount you collect when the time comes- about the same as somebody making $110,000. So you don’t “use” any more portion than a person making 10 times less, but you get to pay much more? I can’t find the logic in that.
I also think the Medicare payroll tax will need to be raised on everybody. Again-this cannot and should not just come on the backs of high income earners, who according to actuarial tables, are generally healthier and have far fewer lifestyle issues (as a group) than lower income brackets. And, in the end, the insurance you get from Medicare is the same for all. Can’t just raise the rates on somebody’s insurance because they’re well off, can you? Especially if they are more healthy…
Ron alluded to it. Out of that budget, how much is pork? Plenty. How much is fraud (Medicare andybody)? Plenty. Much of that money is wasted. And “other”. That’s a curious one too. I look at those numbers and wonder how much is going straight out the window. Printing worthless paper did nothing to help the value of those dollars either. I’m willing to bet that number is trimmable.
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Of course the number is trimmable…but where and how? One mans pork is another mans constituency priority. “I’ll vote for your garbage project if you’ll vote for mine.” You guys want to ban pork barrel projects? Great, where do I sign up? It’s minor in budget terms but it speaks volumes in political terms. You want a smaller government? Great, where do I sign up? But do you want to fire 20,000 government employees in the middle of an economic downturn? Cut their COLA salary hikes? Hell yeah!
I wonder how everybody feels about the idea of increasing their Medicare tax from 1.45% to 2.45% across the board. It’s clear from the chart that, on average, peoples Medciare claims are more than 2.5 times greater than what they pay in to the system. We are ALL taking the Medicare system for a ride. Are we “entitled” to that? Conservatives are staunchly opposed to more government intervention in our health care but I wonder how you all feel about actually paying for the health care we demand? Certainly an across-the-board increase in Medicare taxes would violate Obama’s promise not to raise taxes on incomes below $250,000; but I wonder what you all actually think about taking so much more out of the system than we pay in? Shouldn’t this system be self-financing?
Mike,
“Spending outside of one’s district always seems outrageous, but within your own district seems pretty reasonable.”
Whoops-hit the button too quickly.
The above quote came from Obama at the GOP House Conference the other day. An therein lies the problem.
Yes to across the board Medicare tax hikes. Yes to self-funding, at least as far as it can.
Out of those 20,000 paper pushers, you would think that at least a few of them could uncover the fraud and waste in the Pentagon, HUD, even Homeland Security. If those clowns just enforced the law that would save huge amounts of money. C’mon, if 60 Minutes managed to uncover waste… Well, I just trimmed billions right there. Take it and run boys.
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Good article, Mike and good detail about where the money is going.
One thing I do wonder about, as has Laurie, is the raise in Social Security tax on those who are making more than a million dollars. I probably look at this differently than a lot of folks, but I don’t consider Social Security to be a tax. We simply pay money into the system and expect to get it back out when it is our time to retire. We are supposed to be able to receive back according to what we pay in. My first reaction to raise the Social Security tax would be no.
You already know how I feel about raising taxes. I don’t care much for the idea and I wonder what kind of harm it would do to our economy if businesses see their taxes go up even more. The reason I say that is because I do not believe the businesses will be the ones paying those taxes. It’s already been said more than once, but they will just pass the on to the end consumer.
Having said that and looking at the staggering amount of red ink in our budget, I can not help but wonder if cutting taxes to stimulate the economy will be enough to lower the deficit in any significant amount. Would it be possible to start with spending cuts and make temporary, any taxes that are raised? In other words, phase them out or let them expire when no longer needed? I know Congress does that with the Bush tax cuts, as they have to be renewed every year. Why not do the same with any raise in taxes?
Let me clarify that I was not proposing a massive Social Security tax hike on millionaires. I was suggesting that higher income earners can afford to pay a little bit more into the system. Under my second suggestion the most anybody would pay would be twice what they pay today or $13,420 at incomes of $437,800 or higher. And I thought I made clear, but in case I didn’t, I would not have employers match anything above what they pay in today so there are no additional payroll taxes on employers. I completely share your view Lasrry that taxing business today would be counterproductive. I have no idea how much revenue this would raise but some variation on the idea would help trim the SS gap.
It’s interesting that Obama accused the GOP of opposing him so strenously that they backed themselves into a corner so they can’t negotiate with him. I would now argue that Obama promised himself into a corner by commiting to no tax increases on incomes below $250,000. A Medicare tax increase is important and can be rationally argued (I think I just did that) but he’s unable to take that logical step. A shame…
As a Vet, Mike, I was stunned to see how little we are spending on Veterans Benefits. 125B…that’s it. Wow!
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Wow, you have delved into this a lot more than me, Larry. But good for you: people need to know just what is being planned and how those plans will hit everyone hard, not just the rich.
We need to keep up the pressure because our elected officials are not yet feeling the pain. Well, they did with health care, but not with spending and our national debt.
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Matt,
Thanks, but Mike is actually the one who authored this post. He did a very good job and bringing the details all together.
Those numbers make my head hurt, just like looking at my own budget. Your analogy of running a business was great and logical. But when it comes to the Government they don’t need to turn a profit, and of course nothing is logical.
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