Defense Spending and Some Perspective

When it comes to possible budget cuts, one area that receives attention is the Defense Dept. budget.


To put the current defense budget in perspective, let's look at a few charts, courtesy of The Foreign Policy Initiative (see www.foreignpolicyi.org/content/defense-spending-super-committee-and-price-greatness)


First, over the period since WW 2, the driver in increased federal spending has been entitlements, not defense.







Second, defense spending as a percentage of all federal spending is near an historic low.





Third, defense spending has already been subject to a series of reductions under the current Administration, with long-term cuts amounting to about $850 billion.  In a very real sense, the Defense Department may be able to say that it "already gave at the office."


May there still be some "fat" to be cut?  


Maybe.


Has the defense budget already taken significant cuts? 


Absolutely.

Sequestration and A Reality Check – Part Two

Let’s assume, perhaps out of an excess of pessimism, that the Supercommittee does not agree on $1.2 trillion in savings, the mandated cuts are triggered and no legislation passes avoiding such cuts.

How much money would actually be saved by the sequestration of the otherwise planned spending?

The answer, disappointingly, is: Not much.

As a study (see http://mercatus.org/publication/federal-spending-without-sequester-cuts) by Veronique de Rugy at George Mason University shows, using Congressional Budget Office numbers, the “sequestration” of planned spending would result in total additional spending by 2011 of $1.6 trillion; without sequestration, the additional spending would be $1.7 trillion. 

So, the total effect of sequestration would be a reduction in spending of less than 6% and far less than the President’s Fiscal Commission recommended.

Examine her graph below, and if you can see the difference between the two lines, your eyes are better than mine:

The takeaway?  If the Supercommittee doesn't reach agreement, and the planned amounts are sequestered, we’re still headed off a financial cliff, albeit at a trot, rather than a gallop.

If they do reach agreement, but only to the extent of the otherwise sequestered amount, and fail to "think bigger," the same result applies.


It makes one wonder a bit as to what the fuss is about in the media re whether or not the sequestration trigger gets pulled.

Sequestration and A Reality Check – Part One

In this last week before the supposed deadline for the Supercommittee to resolve the issue of possible budget cuts, perhaps it’s a good time to do a reality check.

It’s a common belief, and I’d suggest an incorrect one, that if the Supercommittee fails to reach an agreement on $1.2 trillion in budget cuts over the next 10 years, there will be mandatory cuts in both the defense and non-defense budgets.

[Note that even if the Supercommittee does not each agreement, any “triggered” budget cuts will not take effect until 2013.]

Well, yes – on one level that’s what the deal was, as reached by the President and the Republicans this Summer, and as enacted by Congress (and signed by the President) at that time.

However what Congress does can be undone, subject only to a Presidential veto, which can (in turn) be undone by Congress.

Thus, if no agreement is reached, Congress could simply amend or repeal its earlier law mandating any “triggered” budget cuts.

Speculating, it seems unlikely that the President would veto any such acts of Congress, particularly if they were supported by many Democratic members of the House and Senate.

What would follow that is even more speculative, but I, for one, would hate to be any Congressperson running for re-election and who had voted in favor of kicking the can down the road, particularly if that triggered further downgrades in the government’s bond ratings.

Dissatisfaction with ObamaCare Rises, Even Among Democrats

It's probably fair to say that one of the President's most important achievements was the passage of health care reform.  While some of us (the author included) felt that the reform did not go far enough, and remain skeptical of its ability to "bend the cost curve downwards," the effort was clearly one of the Administration's central priorities.


But how does the program play out with voters, given the impending 2012 battle over the President's possible re-election?


Well, the latest poll, by the non-partisan Kaiser Family Foundation (see www.kff.org/kaiserpolls/8251.cfm), gives us some data relevant to that question.  


That poll reports that support for ObamaCare has declined significantly, including (surprisingly!) among self-identified Democrats, the President's core constituency.


Here are some of the findings:


. . . this month's tracking poll found more of the public expressing negative views towards the law . . . 51% say they have an unfavorable view . . . while 34% have a favorable view.


The change in favorability this month was driven by waning enthusiasm for the law among Democrats, among whom the share with a favorable view dropped from nearly two-thirds in September to just over one-half (52%) in October.


Americans are more than twice as likely this month to say the law won't make much difference for them and their families as they are to say they'll be better off under the law . . . Here, too, changes in views among Democrats helped shape the overall change.


While the largest factor in voter's minds as the 2012 election approaches is likely to be the economy (and particularly the unemployment level), declining support for one of the President's signature programs, especially among his natural supporters, is not a good sign for him or fellow Democrats further down the ticket.

Politics as Usual?

As many of our readers will recall, in 2008 Senator Obama ran on a theme of "hope and change," which included a promise to desist from practicing politics as usual.  


Understandably, that excited the President's supporters and was probably a significant factor in the high level of energy, emotional support, precinct-level work and contributions evidenced by his followers.


However, the actual performance of that promise may have been compromised, as disclosed by a recent New York Times article (see www.msnbc.msn.com/id/45072966/ns/politics-the_new_york_times/#.Tqws1WDx-zs.)


Here are a few excerpts from that article, relating to contributors to the President's 2012 re-election campaign and various "bundlers" of contributions:

At least 15 of Mr. Obama’s “bundlers” — supporters who contribute their own money to his campaign and solicit it from others — are involved in lobbying for Washington consulting shops or private companies. They have raised more than $5 million so far for the campaign.

Because the bundlers are not registered as lobbyists with the Senate, the Obama campaign has managed to avoid running afoul of its self-imposed ban on taking money from lobbyists.

But registered or not, the bundlers are in many ways indistinguishable from people who fit the technical definition of a lobbyist. They glide easily through the corridors of power in Washington, with a number of them hosting Mr. Obama at fund-raisers while also visiting the White House on policy matters and official business.

. . . 

While none of the bundlers is currently registered as a federal lobbyist, at least four of them have been in the past. And a number of the bundlers work for prominent lobbying and law firms . . . 

Perhaps even more indicative of the continued strength of political realities is the fact that, as reported by the Center for Public Integrity and ABC News, (see www.iwatchnews.org/2011/06/15/4880/obama-rewards-big-bundlers-jobs-commissions-stimulus-money-government-contracts-and)

More than two years after President Obama took office vowing to banish “special interests” from his administration, nearly 200 of his biggest donors have landed plum government jobs and advisory posts, won federal contracts worth millions of dollars for their business interests or attended numerous elite White House meetings and social events

Nearly 80 percent of those who collected more than $500,000 for Obama took “key administration posts,” as defined by the White House. 

More than half the ambassador nominees who were bundlers raised more than half a million.

Here are some graphic expressions of the findings:

While it's certainly true that other Administrations have behaved similarly, it's worthwhile to note that while both the Bush (2) and Obama administrations have appointed about the same number of bundlers, Obama reached that figure in two years, while it took Bush eight years.

My reaction, then, is not that I'm surprised, or even particularly bothered, by the fact that, at least in this area, "politics as usual" continues to apply.  It's simply that it's difficult to reconcile behavior with rhetoric.

Or, to put it more simply, no voter likes sanctimony, particularly when it's false. 

Further on 9/9/9

Today the Tax Policy Center released its analysis of Mr. Cain's 9/9/9 proposal.


As analyzed by that group, adoption of the plan would result in lowered after-tax income (due to increased taxes) for all groups making less than $200,000 per year in income.  Taxpayers above $200,000 in income would actually see an increase in their after-tax income, due to lowered taxes.


For example, a household with $20,000 to $30,000 would see their taxes increase and an income drop of over 16%, a household with $40,000 to $50,000 would see an income drop of over 11% and a household with $200,000 to $500,000 would see an income increase of about 5%, all making the tax structure less progressive than it is today.


As noted before, this may be good or bad policy depending on your political and economic viewpoint, but is unlikely to attract the majority of voters in an economy where many people are already struggling.  


Tax the rich may sell politically; tax the poor never does.


The relevant analysis is at http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=3221&DocTypeID=1

The 9/9/9 Plan - An Analysis

As many of our readers already know, the 9/9/9 tax plan proposed by Republican presidential candidate Herman Cain has generated a fair amount of interest, some positive and some negative.  In fact, on a radio talk show last evening where Andy and I were guests, a number of the callers brought up the plan and wanted to know more.


So, let's start with some basics:


The plan would replace the current, extremely complex tax structure of varying marginal tax rates and a host of deductions (not all of which are available to all taxpayers) in the personal income tax code. The plan would, among other things, end the estate tax, the payroll tax (used to fund Social Security and Medicare), and the capital gains tax. 


Instead, individual taxpayers would pay a flat tax rate of 9 percent, irrespective of their income level, homeownership, number of children or otherwise; the only deduction would be for charitable giving. 


Businesses would pay corporate taxes at 9 percent, and, as something very new for Americans, there would be a new federal sales tax (in addition to any state or local sales taxes), also set at 9 percent.


Mr. Cain claims that the new tax structure would be revenue neutral - that is, it would collect for the federal government the same amount as the current structure provides.  


There's some debate as to that claim (a difficult debate to resolve, since the issue centers around how a new tax structure might change American's economic behavior, something that's perhaps unknowable at this point), but for purposes of this analysis, let's assume that it's correct.


One of the questions that arose on the radio show was: What the effect of this proposal would be on typical taxpayers?


To answer that, I went to the internet and the most cogent analysis of the proposal seemed to be that of Ezra Klein, of the Washington Post, of which I've reproduced highlights below.  (The full posting is at www.washingtonpost.com/blogs/ezra-klein/post/the-9-9-9-plan-for-an-average-household-and-for-a-wealthy-one/2011/08/25/gIQAGKYzhL_blog.html#excerpt.)


"I asked Edward Kleinbard, a tax law professor at the University of Southern California, to walk me through the tax burden for a typical family of four with an income of $50,000 in the current system and under Herman Cain’s plan. Before we get to the details, here’s the bottom line: Cain’s plan would increase the family’s tax bill by thousands of dollars.

Let’s start with the calculations for the current system. If you take the employer and employee side of the payroll tax, payroll taxes come to 15.3 percent of our hypothetical family’s $50,000 income.  Final bill? $7,650 in payroll taxes. But that’s almost all they’re going to pay in federal taxes.

When it comes time to fill out their federal income taxes, they take the standard deduction ($11,400), plus four personal exemptions ($3,650 each), plus two child-tax credits ($1,000 each), which leaves them paying $766 in federal-income taxes.

Total tax bill? $8,416.

Cain’s plan, by contrast, acts like a 27 percent payroll tax with basically no exemptions. To understand why that is, read my earlier post, or, if you really want the details, see Kleinbard’s full analysis. So here, too, the calculation is fairly straightforward: $50,000 x 27% = $13,500.

And that leaves us with simple subtraction. $13,500 - $8,416 = $5,084. That’s how much more a family of four with $50,000 in income and a very simple tax return would pay under Cain’s 9-9-9 plan.

. . .  let’s look at the other side of this, too. Take a family of four with $1,000,000 in income. I wanted to stop bothering Kleinbard at this point, so I just ran these numbers myself. Assume again that the family files a very simple tax return: standard deduction, four exemptions. According to Turbotax, they would owe $311,208 under the current system.

Cain’s plan is a bit tougher to apply to them. Many of his taxes are consumption-based, and it’s likely that this family would hold on to much of their income in any given year. But as the tax professors will tell you, all income is eventually spent, so all the income they make this year will eventually be taxed under the 9-9-9 plan.

If you grant that premise, then the calculation is no harder than it is for the family of more modest means: $1,000,000 x 27% = $270,000.  That means that the 9/9/9 plan is, for a household making $1,000,000, a tax cut of $41,208 ($41,208) . . . "

Assuming this analysis is correct, the 9/9/9 plan generates significant tax increases on the middle class, and significant tax cuts for the upper class.


Putting to one side any philosophic debate on tax "fairness," any tax plan like 9/9/9 is going to be a very tough sell for any presidential candidate, especially in a time of economic stress.


David Holmes