Helping Advisors Blog

Obama’s 2012 budget

Since our last edition of Taxing Times, Obama has presented his 2012 budget for fiscal year starting in October. While it purports to reduce total government spending by over $1 trillion through 2020 and lower the deficit to 3.2% of GDP by 2015, the budget’s priorities are similar to its 2011 predecessor which has not passed Congress. The president’s budget, often referred to as a “wish list” to Congress, reiterates his default themes of taxing high wage earners and business as major sources of revenue raisers. From a spending perspective, outlays exceed receipts by almost 11% of GDP this year and highlight new infrastructure and transportation outlays.

While deficit spending may be appropriate for an economy repairing from a deep recession, this overage is worrisome long term. Jack Lew, the Office of Management and Budget’s director, calls the plan a “primary balance strategy” which is analogous to an indebted family, spending more than it earns but deciding to stop increasing its credit card debt as the first step to managing expenditures and debt service. The debt would still be there and the credit card balance increases by the full amount of the interest on the past balance, but the rate of growth would slow.

Not many spending cuts

Probably the most disappointing – but not surprising – aspect of the proposed budget is its lack of initiative regarding tax reform, especially in light of the Deficit Committee’s proposals in December 2010. The President relies on a combination of spending cuts and increases to fill shortfalls but does not address larger issues such as entitlement reform for future spending. Social Security, Medicare and Medicaid altogether comprise about 40% of budget outlays but are projected to grow much faster than revenues (5.4% for Social Security and 6.8% for Medicare) through 2020 primarily due to the baby boomer demographic bulge.¹ Significantly the budget avoids addressing these looming outlays and targets only spending reductions in the discretionary part of the budget. The initial spending cuts total less than 1% of the $3.7 trillion proposed budget. In terms of magnitude, Republican cuts are similarly tiny totaling about 2%, or $62 billion.

Businesses pay more

Against a backdrop of attempted fiscal responsibility, Obama has been calling for corporate tax reform to allay business fears and engender the business community’s support. Is this lip service? The trend of lowering statutory corporate rates from 35% while broadening the tax base was proposed by Obama’s Deficit Cutting Commission in December 2010 and reiterated in February. In fact, the 2012 budget proposes over $350 billion in new taxes on businesses although there is a sweetener of making the Research and Development deduction permanent. Ideas floated in December to attract corporate support included a potential repatriation holiday, similar to 2004, to attract more than $1 trillion of overseas profits back to the U.S.; taxing these funds at a lower rate (such as the 5.25% rate in 2004) would provide an incentive to invest domestically and to create jobs. While such a provision is disliked by Treasury secretary Timothy Geithner,² Democrats may be compelled to horse trade with the Republicans to enlist their support for a budget compromise.

And so do high wage earners

For individuals with high earnings, the 2012 budget proposes tax hikes totaling $340 billion (slightly less than new business taxes.) Increases include the estate tax and various limitations on the deductibility of itemized deductions to individuals above the 28% tax bracket.

“Fixing taxes is not my problem”

According to a recent poll by the Pew research Center, 87% of Americans agree that strengthening the nation’s economy is a priority while 84% agree that improving the job situation is a primary concern for the president and Congress. Asked to rank current issues in order of priority, simplifying the tax system is ranked #18 out of 22.³ Apparently, the issue of the tax code is someone else’s problem, not the general populations’.

While corporate America and the highest wage earners are the most immediately affected by current tax proposals, we note that December’s “Tax Cut & Unemployment Insurance Compromise” benefits Americans paying into Social Security, unemployed citizens, students, children and entrepreneurs.⁴ Americans have become accustomed and like the cut in payroll taxes, annual fix to the Alternative Minimum Tax, and extension of the Bush tax cuts. Today American’s tax burden is 2% below its fifty year average.⁵ Unfortunately, all signs point to future tax increases even with spending cuts. Despite any cuts to discretionary spending, overall federal spending is poised to rise with entitlement spending growth.