Economy & Business

A Busted Budget

‘We’ll put people to work repairing crumbling roads, bridges, and schools by eliminating the backlog of well-planned, worthy, and needed infrastructure projects.” So promised President Barack Obama in 2009, arguing for a gigantic stimulus bill, which he secured, at an expense to taxpayers of $831 billion. That’s the best part of a trillion dollars, which should have uncrumbled a great many bridges and patched up a lot of blacktop. But those projects, endlessly described as “shovel ready,” turned out to be something less than “well-planned” and “worthy.” In a development straight out of Bastiat, we paid to replace the windows on a long-shuttered visitors’ center at Mount Saint Helens, subsidized casinos and sports stadiums with politically connected owners, poured millions into developing content for a website devoted to ants, built sidewalks to nowhere, and studied how monkeys feel about inequality.

Now the same gang is back, asking for three times as much.

The president’s proposed budget contains nearly $3 trillion in tax increases to pay for the repair of those crumbling bridges and highways the last trillion or so was supposed to take care of, along with “free” community college — free stuff is shockingly expensive — and related initiatives that are cynically crafted full-employment programs for Democratic activists rather than genuine public goods. There are some infrastructure projects in dire need of attention and funds, but Congress would be foolish to trust Barack Obama & Co. on any more than that.

About those tax increases — they include: higher personal-income taxes, higher business taxes, higher investment taxes, higher sales taxes, new taxes on retirement savings, a new tax on the holdings (not the income, but the assets) of banks, and new taxes on self-employed people.

The administration and its media minions characterize this program as raising taxes on “the rich” in order to fund benefits for “the middle class.” But the opposite is in reality closer to the case: The federal contractors and college administrators who will sop up lots of new spending in this budget are in the main very well-off. The people who will pay the taxes, not so much. For example, the administration’s plan to nearly double cigarette taxes — raising the punitive levy from $1.01 a pack to $1.95 — will fall disproportionately on those of more modest means, who smoke more. Raising taxes on businesses runs into the usual problem, the reality that corporations are not tax-payers but tax-collectors, and that the more powerful and better-connected firms are able to pass new tax liabilities on to consumers or to vendors and suppliers. The new taxes on investment — from capital-gains taxes to new taxes on IRAs — are a tax on economic growth, a punishing excise on the investment that drives innovation and employment in a sophisticated, capital-intensive economy such as ours. Raising taxes on “corporations” and “the rich” sounds attractive to the class warriors, until you realize that this means your employers, customers, lenders, business partners, landlords, etc.

The administration makes a gesture toward the problem of corporate profits parked overseas, i.e., the peculiar situation in which the U.S. government shrinks its corporate tax base by maintaining the highest corporate-income tax rates in the developed world and insisting that the reach of its taxing authorities is global, in contravention of the nearly universal practice of a nation taxing only business done within its borders. Under U.S. practice, our destructively high corporate tax rate is applied not only in the United States but to business done by American firms in every other country in the world, too. The natural response on the part of multinational businesses has been to leave those profits abroad, untouched by American tax authorities.

Obama’s budget offers a one-time window during which U.S. firms may repatriate their global profits in exchange for Washington’s seizing 14 percent of them (much less than usual), after which a 19 percent tax would be applied to overseas earnings (less than is the case now). That is the wrong solution, inasmuch as it keeps the United States in the same league as North Korea in purporting to have a worldwide taxing authority. The adoption of a territorial tax system, along with reform of a corporate tax code that combines the worst of both worlds — sky-high rates and a rats’ nest of special-interest deductions and exclusions for firms with the clout to demand them and the resources to negotiate the labyrinthine tax code — is what’s needed.

But taxes are only one side of the ledger. On the spending side, Obama seeks the repeal of sequestration, the budget caps agreed upon as part of the last grand fiscal compromise — caps that have proved themselves relatively useful. Under sequestration, spending reductions were split evenly between defense programs and “non-defense discretionary” programs (domestic spending that excludes Social Security, Medicare, and other “mandatory” outlays). Obama’s proposal would repeal that and split new spending evenly among defense and non-defense discretionary programs. The even split was a poor choice for sequestration and would be a poor choice for undoing it, too. National defense is a core federal responsibility, and one that has been shortchanged of late, as any honest inventory of military manpower and readiness shows.

For budget hawks, sequestration itself is desirable; for hawk-hawks, a relaxation of spending restraints that treats our national-defense apparatus as just one more hungry mouth competing for Washington’s attention is a step in the wrong direction. Obama and the people who made him president may not approve of the military responsibilities that the United States shoulders around the world, but we have taken on those responsibilities nonetheless, and President Obama has not been shy about expanding them, either. This isn’t some cowboy-poetry festival in Nevada or a federal subsidy for getting monkeys high on cocaine or any instance of the vast array of trivial pursuits that Democrats see fit to pour money into: This is our national security, and whether the subject is budget or policy, it comes first. That means compromise may be possible, but a split would have to be tilted a good deal more toward the Pentagon than the one the president has offered.

Budgeting is primarily a legislative activity rather than an executive one. The president has had his say, and Congress should run most of this proposal through the shredder twice for good measure. And then get to work on what needs doing. 

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