It’s the Entitlements, Stupid!

G’Day!

With apologies to President Clinton for modifying his famous phrase, this time “It’s the Entitlements, Stupid!” Virtually everyone with a functioning brain knows that our exploding National Debt and $1 trillion annual Federal Deficits are unsustainable. Without a solution to this government-imposed national crisis, the American economy will continue to stagnate, unemployment will be high, job opportunities low, and the country may ultimately decline into bankruptcy. Also, anyone with a functioning brain knows that the solution to this problem must involve compromise and agreement among the three (3) fundamental contributors to the problem; “Entitlements,” “Discretionary Spending,” and “Tax Revenues.” By listening to the Media, President Obama, and the Democrats, you would conclude that the sole cause of our country’s fiscal and debt crisis is insufficient “Taxes on Rich.” Nothing could be further from the truth. This is like trying to stand on a 3-legged stool with two of the legs removed.

Let’s analyze President Obama’s only publicly proposed solution, “Tax the Rich.” Our annual federal deficit is currently $1.3 trillion. Obama’s proposal with possible outcomes is presented below:

Obama “Tax the Rich” Proposal

Possible Annual Revenue (billions)

% Deficit Solved

Raise top 2 rates on Incomes above $200-250,000 from 33 to 35% & 36 to 39.6%

$44.2

3.7%

Raise Dividend tax from 15% to Ordinary Income Rate

$20.6

1.7%

Raise Capital Gains tax fro 15% to 20%

$3.6

0.3%

Reinstate the Pease limit on Itemized Deduction

$12.3

1.0%

Reinstate the Personal Exemption Phase-out (PEP)

$4.2

0.4%

Subtotal Tax increase for Upper-income

$84.9

7.1%

Restore Estate & Gift Tax to 2009 levels

$11.9

1.0%

Total Government Tax Revenue

$96.8

8.1%

 

The above result is a static analysis and assumes no income or behavioral change by taxpayers (highly unlikely). In total, Obama’s “Tax the Rich” solution would potentially generate $96.8 billion per year and solve a mere 8.1% of our annual fiscal deficit problem. Since neither Obama nor the Democrat leaders have publicly suggested any change in either “Discretionary Spending” or “Entitlements,” this would leave a continuing federal deficit of approximately $1 trillion per year or 92% of the fiscal problem unresolved. (Interestingly, a $1 trillion annual deficit is the amount in Obama’s currently proposed budget for the next four (4) years.) This is blind insanity and “Ostrich Management.”

“Entitlement” reform for Medicare, Medicaid, and Social Security combined with growth oriented “Tax Reform” and “Discretionary Spending” cuts are the only ways we can avoid the trap that Greece and other European socialist countries have created for themselves. By insisting ONLY on “Taxing the Rich” with no consideration for “Discretionary Spending” cuts or “Entitlement” reform, Obama appears to be more interested in political ideology than in solving our nation’s economic problems. Without correction, we will create a European slow growth dependent society for America and potentially financial collapse. We must demand a better and more comprehensive performance from our government. I believe the Republicans are correct in demanding that any agreement on additional tax revenues must be accompanied by significant cuts in federal spending.

Let’s review some fundamental facts about our unsustainable National Debt and continuing Fiscal Deficits. The table below summarizes the major items in our national economy and Obama’s 2012 enacted budget.

Item

2012 Budget Amount (Billions)

Total Current National Debt

$16,200

Estimated Gross Domestic Product (GDP)

$15,797

Total Federal Government Receipts (Tax, etc.)

$2,469

Total Federal Government Outlays

$3,796

Annual Federal Surplus (Deficit)

($1,327)

Total Mandatory “Entitlement” Outlays

$2,252

Health (Medicaid, etc.)

$361

Medicare

$484

Social Security

$818

Income Security (Food Stamps, Unemployment, Housing, etc.)

$580

Net Interest on Debt

$225

Total “Discretionary” Outlays

$1338

National Defense

$702

Education

$79

 

Federal outlays in 2012 are expected to be $3.8 trillion (24% of GDP) with a $1.3 trillion deficit after government revenues of $2.5 trillion. Mandatory “Entitlements” total $2.3 trillion, (60% of federal outlays and approximately 15% of GDP), AND are growing at an alarming and unsustainable rate. Discretionary federal outlays (including National Defense) are $1.3 trillion. Simple math indicates that to balance the budget without “Entitlement” reform, the entire Federal Government “Discretionary Spending” (including National Defense) must be eliminated or tax revenues increased across-the-board by approximately 50% to eliminate the deficit. Neither of these alternatives individually or in combination is feasible or desirable. Currently the largest federal “Entitlement” outlays are: Health (Medicaid) & Medicare $845 billion, Social Security $818 billion, Income Security $580 billion, and Interest on Debt $225 billion. (Please note that “Interest on Debt” is unusually small based on an artificially low interest rate (approximately 1-1.5%) resulting from global economic problems and monetary support by the FRS. When interest rates return to normal levels the $225 billion could easily double or more in a very short period of time. Remember, interest rates were in the double digits in the late 1970s and early 1980s. Just look at the recent government borrowing rates in the troubled countries in Europe.)

While the mandatory “Entitlement” programs have good intent and are desirable, they are not sustainable and are inconsistent with economic growth policies. “Entitlements” are where the big federal outlays reside and must be part of a major solution to our fiscal and debt crisis. “Entitlement” reform is the most significant fiscal spending problem we face. Fortunately, we have excellent proposals from Conservatives and bipartisan groups available on how to fix “Entitlements” (see Bowles-Simpson, “The Moment of Truth,” Domenici-Rivlin, “Restoring America’s Future,” and The Heritage Foundation, “Saving the American Dream”). It would be helpful if Obama and the Democrats would acknowledge these or offer proposals of their own. It won’t be easy but as I said in the title, “It’s the Entitlements, Stupid!”

Let’s get to work and save our country!

The Old Guy PhD

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