Last week, Examiner.com readers were given the chance to address questions to White House officials. One question submitted by the Atlanta Conservative Examiner was selected and has been answered by Jason Furman, Principal Deputy Director of the National Economic Council in a video posted on YouTube.
The question was, “Since the federal budget is composed increasingly of entitlements, is the President open to entitlement reform in order to avoid a national bankruptcy?” According to the Center on Budget and Policy Priorities entitlement spending makes up 55 percent of federal spending. This number is growing larger and will increase sharply if the Affordable Care Act (Obamacare) is allowed to take effect. The Heritage Foundation estimates that by 2049 entitlement spending will consume 100 percent of tax revenues.
Furman says that the president is open to entitlement reform, “but he would he would only do them as part of a balanced plan that also addresses the revenue side.” He then goes on to say that such a balanced plan would ensure “that high income households are paying their fair share of the taxes so you don’t have a situation where millionaires can be paying an even lower tax rate than the middle class.”
Essentially this means that the White House is refusing to act to save Social Security and Medicare unless the Republicans give in to their demands for a tax increase. Even many Democrats believe that raising taxes in the midst of a recession would be disastrous. When President Hoover raised taxes and increased spending in 1932, it turned a recession into the Great Depression. It also means that, since the Republicans are not going to raise taxes, President Obama is not going to do anything to reform entitlements. The problem will continue to get worse under his watch.
Furman’s rationale has several flaws. The most obvious is the notion that the rich aren’t “paying their fair share.” While Obama and the Democrats never really tell us exactly how much they consider a “fair share” of the rich to be, an Atlanta Conservative Examiner article from last August examined tax statistics and found that the top one percent of earners already pay 38 percent of all income taxes. The top 10 percent of earners pay almost 70 percent of income taxes. It seems as if the rich are not paying their fair share; they are paying more.
Raising income tax rates on the wealthy would probably not make millionaires like Warren Buffett and Mitt Romney write bigger checks to the government. This is because most of their income is through dividends and other investment income, which is taxed differently. The top income tax rate is currently 35 percent, but dividends are taxed at 15 percent.
The reason that dividends are taxed at a lower rate than ordinary income is that this money has already been taxed once. Before a dividend is paid, a profit has to be earned by the company. When the company earns a profit, the government taxes this corporate income at 35 percent, the second highest corporate tax rate in the world.
A big problem is that no one pays the published tax rate. Just as individual taxpayers take deductions on their income tax, businesses take deductions and write-offs on their corporate taxes. To make matters worse, Congress passes special tax breaks and deductions for politically connected companies and industries, which is probably a violation of the Equal Protection Clause of the Fourteenth Amendment.
If tax rates are increased, tax revenues won’t necessarily increase because the wealthy will be hiding their money in tax shelters or lobbying Congress for ways to reduce their bill. But Obama realizes this. In a 2008 debate aired by ABC News, when the moderator pointed out that revenues increased when the capital gains tax was cut by Presidents Clinton and Bush, Obama maintained that he wanted to increase the tax “for purposes of fairness.” (In the same clip, he advocated pay-as-you-go and railed against the increase in the federal debt under George Bush. In practice Obama has accumulated debt at about twice the rate of Bush.)
While President Obama holds out for tax increases, Medicare is hurtling towards insolvency. In May 2011, the Board of Trustees estimated that Medicare, which is already paying out more than it takes in, will be insolvent by 2024, scarcely more than ten years from now. Even more dire, Social Security’s disability fund is estimated to run out of money in 2017. Social Security’s retirement fund will be depleted in about 25 years if changes are not made. Delaying reform of these programs will make it harder to save them.
President Obama has a chance to have a positive and lasting legacy by leading the effort to reform entitlements. If he does, he can be remembered as the man who saved Social Security and Medicare. If he abandons his demand for higher taxes, the two parties may be able to come to an agreement to cut federal spending and finally start reducing the debt, which more and more Americans understand is one of the greatest threats we face as a nation.
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