Can We Really Afford These Tax Breaks?

Also posted on www.MosaicConsultingOnline.com.

This week, two events happened that have me scratching my head.  The first was the release of President Obama’s 2013 Budget, the last of his first term.  The second event is the soon-to-be passed bill extending the payroll tax cuts and jobless benefits.

In the President’s Budget, we have what most political analysts call the outline of Obama’s campaign for re-election.  And listen, I’m not hating on him for spending some time on the job campaigning.  Anyone who is pursuing the path to the White House is already making the rounds, so there’s no reason why Obama shouldn’t be making a couple campaign speeches himself. I guess what puzzles me about the Budget–and what screams “Hey guys, I’m running for office again!!”– is not what’s in it but what is missing.

 The President released a $3.8 trillion budget for 2013.  The White House says that, if enacted, this budget would cause the federal deficit to fall from $1.33 trillion in 2012 to $901 billion in 2013.  While a reduction in the deficit is the direction we want to be headed, we will still end up with a higher deficit than was promised when Obama released budgets in years past. Plus, given the contentiousness of the present Congress and the fact that it’s an election year, it’s unlikely that any significant part of this Budget will be enacted.

As in previous years, this budget is a mix of spending and revenue raisers. The President wants to spend about $350 billion on stimulus, mainly for education and extensions, and about $476 billion on transportation and infrastructure.  He plans to raise about $1.5 trillion in revenue mainly by eliminating the Bush tax cuts for families who make $250,000 or higher per year, as well as on mandatory spending cuts and cuts to Medicare.

For the most part, this Budget could be a cut-and-paste of prior years’ budgets with a few exceptions.  In general, the tax cuts for the rich are still there, including a brand new provision that would eliminate the AMT and replace it with the “Buffet Rule,” an imposition of a 30% tax on income for individuals who make $1 million or more.  Stimulus for infrastructure, education, families, and energy were also included.

What was not included in the Budget, and what made me yell at the TV commentator who was reporting on this, was any mention of entitlement reform. Back in the spring of last year when Congress was fist-fighting over whether or not to raise the debt ceiling, any mention of entitlement reform was immediately rebuffed with “Social Security is not part of the deficit!”  While that might be true, that’s actually not the point.  The fact is, the government spends a significant amount of outlays to paying entitlement obligations.  In 2010, the government spent about $3.5 trillion dollars, with about 60% of total outlays going to pay Social Security, Medicare and other mandatory benefits.  These are non-discretionary payments and cannot be cut without meaningful reform.  In fact, left unchecked and unchanged, it’s expected that by 2020, total outlays to pay interest on the debt and entitlement benefits could reach 90% of all government spending!

With recent arguments over the exploding deficit in Washington, one would think that our conscientious leaders would mobilize and come up with some guideline for reform that they can agree on.  Sure, there have been ideas batted around to fix Social Security.  Some politicans recommend raising the retirement age to 69 or even 70; increasing the tax on Social Security for all, for the wealthy only and/or on employers; increasing the amount of total income subject to Social Security tax; or even a means test that would determine who gets Social Security benefits-and how much- on a case-by-case basis.

I had hoped that in light of these recent conversations, we would hear something from the President about this looming crisis…instead, we heard crickets.  I understand this is an election year and Social Security reform is a sore spot for any politician seeking office, especially since the Baby Boomers make up a large chunk of our population (and are generally against any tinkering with their benefits), not to mention many of whom get out and vote.  But more of the same (ie. ignoring this problem) can be catastrophic, and as controversial as this topic is during an election year, I think I would have respected the Prez more if he had addressed it anyways.  He didn’t have to stick out his neck and make dramatic proclamations about necessary reforms, but maybe just a shoulder or a thumb or something.

Similarly, I’m not surprised but VERY troubled by the push for extending the payroll tax cut and jobless benefits that Congress passed yesterday, and the President is expected to sign.  As the tax cuts were part of the 2010 Tax Act and would have expired December 31, 2011, Congress did what they do best back in December–which is to  kick the can down the road and extend the cuts for two more months.  So if Congress had not acted before the end of February, our Social Security tax on wages would have increased from 4.2% where it has been temporarily to the standard  6.2% tax.

Since the beginning of the Recession, Congress has tried various ways to spur Americans to start spending and boost the economy. Back in 2008,  President Bush had checks for about $250 mailed to our homes in an effort to get us to start spending again.  What did we do with the cash?  Saved it or paid off debt.  President Obama also instituted tax cuts through several stimulus packages, intended to leave more money in the pockets of American workers, also with minimal effect on the economy.  And with this recent payroll tax cut, American families will have saved about $1000 in taxes in 2011.

But as of yet there is no real way to determine whether the latest stimulus measure actually helped to boost the economy.  Add to that, the issue that this new extension is not expected to be offset by any taxes or cuts to pay for it, and is estimated to add about $90 billion to the deficit.  In fact, at a time when Social Security and Medicare programs are the most vulnerable, the government is planning to send even more IOU’s to the Social Security Trust Fund, further jeopardizing Americans’ retirement future.  I don’t understand why more of our leaders are not troubled by this.

I’m telling you, after all the drama of the past few years, with Democrats  and Republicans going at it and trying to show the American people who cares more about the economy, this extension will leave a sour taste for everyone.  Both parties are responsible for allowing this law to be extended, and several members of both sides have admitted that this is not such a good idea.  If not for the fact that it’s an election year, it’s unlikely that this law would have been passed and the unfunded tax cuts extended.  At least not without a fight.

 I guess it’s up to us to do the right thing here.  Maybe we American families should do ourselves a favor–instead of taking the magical $1000 we supposedly saved in taxes from this bill, and buying new flatscreen TVs, Nikes and IPads, maybe we  put it towards our retirement. At the rate we’re headed, Social Security may not be around for many of us. Someone’s got to be the adult.

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2 responses

  1. Incredibly informative and eye-opening. Thanks for putting an article together that explains things that I think are too complex for me to understand when I am flipping through the news or just reading the paper. I appreciate you taking the time to share your impassioned plea for us to take responsibility on a personal level. You’re right. Social security will not be around. Our social responsibility and “social security” requires us to think for our future and save and plan instead of relying on the government to do it for us.

  2. Thanks Toni! Scary times and even scarier is the way Washington is handling things….it’s a political game and why aren’t we getting mad about this?

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