David Shulman is a retired Wall Street executive who is now a senior economist at the UCLA Anderson Forecast. He is also affiliated with Baruch College (CUNY) and the University of Wisconsin.
In a near complete repudiation of his own Simpson-Bowles Deficit Reduction Commission, President Obama unveiled his election year budget projecting a $900 billion deficit in Fiscal Year 2013. Recall that the Simpson-Bowles Commission called for fundamental tax reform that would increase revenues by lowering marginal tax rates and doing away with an array of tax preferences along with reforming our major entitlement programs. In contrast President Obama's budget raises marginal tax rates and is practically silent on reforming entitlements. It is truly a budget to nowhere and because deficits remain extraordinarily high for a decade increasing our national debt from $16 trillion to $26 trillion; it is certainly not built to last.
One thing you can say about the budget proposal is that it reflects an antipathy to high income Americans by increasing the top marginal rate from 35 percent to 39.6 percent (43 percent with the new healthcare tax) on incomes above $250,000, increasing the capital gains tax from 15 percent to 20 percent, and more than doubling the tax on dividends from 15 percent to 39.6 percent. Further, in a break with tax code precedent, the budget caps deductions at a 28 percent marginal tax bracket, not the new 39.6 percent bracket. And just in case a taxpayer still does not pay at least 30 percent of his/her income it imposes a super alternative minimum tax of 30 percent. To be fair the president is also proposing doing away with the current alternative minimum tax which has proved to be the bane of too many middle class taxpayers. The president forgets that the problem is not that there are too many rich people in America, but rather there are too few.
As a result, over the next 10 years income tax collections from high income individuals rise by $1.6 trillion, but despite the tax drag, economic growth is projected to accelerate to over 4 percent from the current 2 percent or so by 2015. It is hard to see how all of these tax increases will work to stimulate economic growth. Indeed with the high earner income tax increases scheduled to take effect in January 2013 along with the expiration of the current 2 percent payroll tax holiday, it is easy to visualize the economy being whacked back into recession. I guess there aren't all that many Keynesians left in the White House.
Nevertheless tax increases have to be part and parcel with any long-term solution to our deficit problem. Remember even with all of the tax increases proposed by the Obama administration, the budget deficit remains over $600 billion a year for the next decade with the exception of 2018. Their numbers, not mine. Thus all that the Obama budget is doing is kicking the can down the road for future administrations to deal with the really hard decisions needed to maintain the long-term stability of our major entitlement programs, namely Medicare, Medicaid, and Social Security.
To be sure, a Republican budget—and I'm sure Rep. Paul Ryan will come up with one—will approach the problem from the opposite direction with huge entitlement cuts and nary a tax increase. Put bluntly, the Obama budget, for all of its faults, shows how difficult a long-term path to fiscal consolidation will be. But we elect presidents to do the hard stuff and unless there is a meaningfully balanced approach to long-term deficit reduction as outlined by Simpson-Bowles, our fiscal problems will continue to worsen.