No matter how you slice the Obama budget pie, the inescapable fact is that the President wants to get rid of the roughly $1 trillion budget-cutting sequester and substitute in a $1 trillion-plus tax hike. In other words, more spending, more taxing. Growth-busting. The GOP should just say no.
Let me provide some counsel to my Republican friends in Washington, in particular in the House. Balanced budgets don’t create growth. This mantra is wrong. It’s growth that creates balanced budgets.
Cut spending? That’s a pro-growth measure. Lower tax rates? Another pro-growth measure. The combination of limited government and true tax reform will balance the budget soon enough, with government coming in at a smaller share of GDP while sufficient investment and work incentives get growth moving towards the 4% or 5% range.
That kind of growth would make up for the lost ground of the past 15 years. If you add in deregulation and a sound King Dollar, you’d have a growth budget that would propel America back into prosperity.
With some tweaking of eligibility requirements, a true economic-growth budget would lower food-stamp enrollment, unemployment compensation, disability benefits, and other forms of welfare-dependency spending that plague the country. Medicare is a more complex issue, but Social Security would be solved by a long-run growth spurt.
This is not what President Obama is aiming for. He wants more than $500 billion in tax revenue from a 28% income-tax deduction limit. This is not tax reform, since there are no offsetting reductions in marginal tax rates. He also wants a $50 billion Buffett rule that would jack up taxes on capital gains and dividends. He would slap energy companies with a $100 billion tax hike, at least. Offshore corporate income would see a $150 billion tax increase. Banks and financial institutions would get slammed with $100 billion in new taxes.
There’s no serious corporate tax reform in this budget. Even with some temporary tax-credit offsets, some have suggested that there might be room for a 1-percentage point business tax cut, to 34% from to 35%. That’s pathetic. Instead, the most powerful growth measure would have small business, sub-chapter-S-type firms pay the same 25% tax rate as large C-corp companies might. This would be a huge growth booster, and it would attract investment from all over the world.
Then there’s the budget’s incredible and arbitrary limit or tax on — or even possible confiscation of — IRA-type tax-advantaged savings accounts. Who exactly gave the federal government the right to tell free people how much they can save for retirement? Mr. Obama wants a $3 million cap on these accounts. He thinks $205,000 a year in some kind of annuity would “be substantially more than needed for reasonable retirement.” This is statism at its worst.
Plus, people pay taxes when they redeem their IRAs. On top of that, the U.S.A. needs more saving to promotemore investment and create more jobs and growth. Better that savings and investment are tax-free and we tax consumption instead.
I don’t have a problem with Obama’s modest change in the cost-of-living adjustment for Social Security, called the chain CPI. That could be worked in someplace. But in terms of overall entitlement reform, it’s just a drop in the bucket.
It may be possible for Republicans and Democrats to work out deals on gun background checks that won’t violate the Second Amendment. A good deal on immigration reform would substantially promote economic growth in the years ahead. But the GOP should not get suckered into a budget deal that ends the spending-cut sequester and delivers yet another huge tax hike.
The litmus test for budgets should be growth. More spending and taxing won’t get you there. One of the few economic positives from recent government policy is that federal spending could come down a couple trillion dollars if the last two budget deals are held in place. Limiting tax deductions with no offset in marginal tax rates is neither tax reform nor pro-growth.
I’ll give a modest “yes” to political thaws on gun control and immigration if they’re done right. But I give an absolute “no” to the Obama high-tax-and-spend budget proposal.
By Larry Kudlow
This article originally appeared in The New York Sun.