Obama's Budget is Bad Policy and Bad Politics
Preemptive compromise hasn't moved the GOP to raise revenue
April 11, 2013
President Barack Obama's fiscal year 2014 budget request, released this week, is a more centrist blueprint than his previous request, and the conservative tack is most conspicuous and consequential on three fronts: Proposing less ambitious revenue targets, largely abandoning the American Jobs Acts, and identifying social insurance cuts—notably Social Security cuts—the president would exchange for modest revenue increases.
The president's budget has preemptively compromised with Republicans as a gambit to replace sequestration with a "grand bargain" similar to Obama's previous offer to Speaker John Boehner. Politics aside, all three shifts are bad policy.
The United States economy remains deeply depressed, austerity has proven a counterproductive failure, and deficit-financed job creation measures are the only guaranteed means of ensuring full recovery. Likewise, switching to the slower-rising "Chained CPI" for Social Security cost of living adjustments is not a technical improvement, but is instead just a poorly designed (and poorly rationalized) benefit cut.
But the pre-compromise on the Republicans' third rail—raising new revenue—makes zero sense. Remember that "ten dollars in spending cuts for a dollar in revenue" formulation—an empirical policy slam-dunk for the GOP and twice as conservative as the five-to-one ratio for deficit-reduction measures enacted by the 112th Congress—was heretical during the GOP presidential primary campaign.
The hurdle here is getting Republicans to accept the first penny of revenue and buck Grover Norquist's Taxpayer Protection Pledge. Given this, scaling back revenue proposals accomplishes nothing.
The budget again proposes limiting the value of tax preferences for upper-income households and restoring the estate tax to 2009 parameters, and proposes a new minimum tax rate for millionaires known as the "Buffett Rule." This would raise $661 billion over a decade, on top of $660 billion from the lame-duck budget deal. But this limit on tax expenditures raises less revenue than last year's request because of interactions with the new tax rate structure.
The budget also dedicates net revenue savings of $95 billion—mostly from international tax system reforms and business tax preferences—to lowering the corporate tax rate. Revenue would total 19.1 percent of GDP over the decade, down from 19.3 percent in last years' budget (adjusted for revised economic forecasts).
Scaling back job creation measures is bad policy, but it does increase deficit reduction, which the administration has misguidedly prioritized over ensuring full recovery. But abandoning sensible tax reforms worsens the deficit without teasing Republicans any closer to that first penny in revenue.