February 29, 2008

It’s All About the Benjamins for Uncle Sam

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The 2008 presidential campaigns have been filled with promises and ideas, some good, some bad. Hillary Clinton and Barack Obama want to implement government programs to achieve universal healthcare, a noble cause. John McCain wants to keep troops in Iraq for an indefinite amount of time, which may be a necessity. Yet there is one thing that all of these candidates are neglecting, the federal budget deficit. For the 2007 fiscal year the federal budget deficit totaled $163 billion or 1.2% of GDP, according the Congressional Budget Office (CBO). The lofty promises of our presidential candidates can severely hurt the U.S. economy if they are not properly funded, or eliminated all together.
Let us consider some of the proposals that have been put forward. Clinton’s healthcare proposal would cost approximately $110 billion per year and Obama’s would cost anywhere from $50 billion to $65 billion per year. Both candidates claim that funding would come from rolling back the Bush tax cuts and eliminating administrative costs, among other things. However, without specific details it is hard to know whether or not these measures would truly be able to fund their respective healthcare plans. In late 2007, an AMT tax relief bill cost the government about $51 billion and blatantly disregarded Congresses PAYGO rules. These rules, which require that any loss in revenue be offset by decreased spending or increased taxes, try to ensure fiscal responsibility. When the Senate voted on the AMT relief bill, the PAYGO rules were abandoned in that there was no accompanying decrease in spending or increase in taxes (increased taxes in a slowing economy would not be a good idea anyways). Senate Republicans blocked a move to increase taxes on hedge funds and private equity as a way to compensate for the $51 billion. Conveniently, Hillary Clinton and Barack Obama missed the vote on AMT relief. It can be argued that the AMT relief bill was necessary to help taxpayers, but in the long run this argument may not hold because funding will most likely come from tax increases somewhere down the line. The candidates’ claims that they are proponents of fiscal responsibility should be called in to question.
With the expiring Bush tax cuts and a slowing economy, the next president will have to make some tough decisions that will affect the economic welfare of the United States. The first matter is corporate taxes and capital gains taxes. Neither Clinton nor Obama wants to decrease the corporate tax or capital gains tax, or eliminate the double taxation of dividends. However, in a slowing economy the government will lose substantial revenue. According to the CBO, corporate tax revenues grew at an annual rate of 7.5% from 1997 to 2006, but are expected for fall 1.7% this fiscal year, contributing to the rising deficit for fiscal year 2008. For those of us in New York State, State Comptroller Thomas DiNapoli stated that Wall Street accounts for up to 20 percent of NYS tax revenue and up to 9 percent of NYC tax revenue. It is apparent that trouble in the financial world can and will lead to trouble for government and all other citizens. Now is not the time for Clinton and Obama to be ramping up their hostile rhetoric towards corporate America.
In fact, the candidates’ positions on the Bush tax cuts should leave many of us worried. On the Democratic side, both candidates want to eliminate the tax cuts on couples earning more than $250,000 per year. The Tax Policy Center determined that this would reduce revenue by $783 billion. On the Republican side, John McCain wishes to make the tax cuts permanent, but the Tax Policy Center reports that this could reduce federal revenue by $2 trillion over ten years.
Candidates and voters need to wise up on fiscal policy and the federal budget. The lack of national saving, which the federal budget greatly contributes to, is the leading cause of our current account deficit. The problems surrounding the federal budget deficit are only compounded when the burdens of entitlement programs are taken in to account. Broad government programs that insure and help all Americans sound good, but of course, there is no such thing as a free lunch.