Will Obama or Romney’s Budget Plan Cost You More Money?

Posted in Debt • October 4, 2012

2013 federal budget

The candidates’ recently-released 2013 federal budget plans offer clear contrasts and look poised to spark a healthy debate about the government’s debt and priorities. Of course, these budget plans also contain their fair share of fuzzy math and dubious promises.

With the election nearing, it’s time to learn more about what’s in these plans and what they may mean for you.

Obama Budget Plan

The proposed Obama budget plan has, at its core, three central actions: Investing in infrastructure, doubling payroll tax cuts and raising marginal income rates on the highest earning Americans.

Since the enactment of the so-called ”Bush tax cuts” in the early 2000s, American income tax rates have remained at historic lows. Some economists attribute the country’s dire fiscal straits to reduced tax revenues resulting from these low rates, but the reality is far more complicated. In any event, Obama’s proposed budget aims to restore income tax rates to pre-2000 levels.

Under the Obama budget plan, marginal rates for the bottom four “tax brackets” would remain the same. Only the top two would change: The second-highest would rise from 33 percent to 36 percent and the highest would rise from 35 percent to 39.6 percent. In addition, President Obama has proposed limits on itemized deductions and taxing carried interest as ordinary income.

By raising tax rates, President Obama seeks to increase Federal revenues. He plans to use those additional funds to invest in infrastructure, as well as to offset the lost revenue resulting from the increased deduction in payroll taxes. In so doing, the 2013 federal budget plan hopes to fund job growth through higher taxes on the wealthiest Americans.

However, Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, expresses that the Obama budget plan is only “jammed with anti-growth and anti-small business measures.”

“Under the President’s plan, taxes on the earnings of successful entrepreneurs and investors would jump dramatically. Meanwhile, on the spending side, nothing is done to actually reduce total federal outlays,” Keating says, “This combination of higher taxes on entrepreneurship and investment, and persistently high levels of government spending is a recipe for putting the U.S. on a long-term track of slow growth and poor job creation.”

The Obama budget’s overall effect on the fiscal health of the federal government is a matter for debate. Without taking the positive or negative effects of government spending into account, the Congressional Budget Office (CBO) estimates that the plan will increase the size of the federal deficit by $3.5 trillion over the next 10 years.

While measuring the economic impact of federal budgets is an inexact science, the CBO sees Obama’s budget reducing GDP by anywhere from .5 percent to 2.2 percent during the next five years. Highlighting the uncertainty around forecasted figures, the President claims that his 2013 federal budget will actually reduce the country’s deficits by $3.2 trillion and spur economic growth.

Romney Budget Plan

The Romney budget plan focuses principally on reducing taxes for all Americans, thereby allowing citizens to fund economic growth. Tax cuts include a twenty-percent reduction on income taxes, elimination of the alternative minimum tax and elimination of taxes on dividends and interest for tax payers earning less than $100,000 (individuals) or $200,000 (couples). Gov. Mitt Romney pledges that his plan will be “revenue neutral,” meaning that for every dollar lost in revenue from one change, another would be made to replace that dollar.

The Romney-Ryan plan also aims to reduce the size of the federal government and balance its budget by 2020. Romney’s 2013 federal budget plan would cap federal spending at 20 percent of GDP, several percentage points lower than it is today. According to calculations, between $6 and $7 trillion would need to be cut from the federal balance sheet over the next 10 years in order to realize this goal.

Economic expert and former head of the Council of Economic Advisors for the Reagan administration, Martin Feldstein, said that “it is feasible to combine tax cuts and base broadening as Governor Romney suggests without raising the budget deficit or imposing any middle-class tax increase.”

The needed spending cuts, however, could have serious ramifications for voters who depend upon the government’s largess. According to the Center on Budget and Policy Priorities, achieving these spending reductions would require enormous cuts to “sacred cow” entitlement programs, like Medicare and Medicaid. Since the Romney budget plan vows not to reduce military or Medicare spending, his budget must include even deeper cuts elsewhere.

The Obama vs. Romney Showdown

Economics, especially at this scale, is more art than science. Regardless of your personal political persuasion, there are holes among the Obama vs. Romney budget plans.

Many of the specific details associated with the Romney budget plan are undefined, such as the sources for offsetting revenue to keep the budget “revenue neutral” in light of his well-articulated tax cuts.

Likewise, the Obama budget plan may not adequately address the long-term issue of the budget deficit, without applying an overly-optimistic GDP growth scenario.

Underpinning the entire debate is the question of who best can spur economic growth, the individual or the government?

While campaign promises are notoriously fungible, and the likelihood of either candidate’s 2013 federal budget being enacted as it currently stands is low — Congress, after all, has a significant role to play in the budget process.

Ryan Devereux is a financial blogger who believes that the fiscal decisions being made now will have significant ramifications for years to come. Mr. Devereux believes that each citizen should actively engage their government, from voting for political candidates to filing a property tax protest.

Photo: Austen Hufford

 

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