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The Shortcomings of President Obama’s Deficit-Reduction Proposal

By: David S. Logan

Today, President Obama outlined his deficit reduction plan, claiming it would reduce the deficit by $3 trillion.

  • $1.5 trillion in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases
  • $1 trillion in “cuts” that are anticipated savings from the already underway draw-down of troops in Iraq and Afghanistan
  • $430 billion in “savings” from lower interest rates (not contingent on bill)
  • $250 billion from reductions of payments to Medicare service providers (who are expected to provide the same services at a further reduced rate)
  • $72 billion in cuts to state grants for Medicaid.

The most salient points of the speech were:

  • Social Security should be reformed separately from budget and tax reform.
  • $1 in revenue increases should accompany every $2 in spending cuts.
  • Taxes on those making over $200,000 (singles) and $250,000 (joint) will revert to the Clinton-era rate of 39.6%.
  • Health care payments (Medicare & Medicaid) will depend on success of treatment.
  • Millionaires and the “largest corporations” will be required to pay at least the same rate paid by the “average” family.

Some specific effects which will arise from these proposals include:

  • Creating perverse incentives for healthcare providers
  • Decreasing the long-term solvency of Social Security by claiming to veto any bill affecting Social Security without nebulously defined revenue increases
  • Handicapping lawmakers with the 2:1 spending-cut-to-revenue-increase ratio
  • Relying on static economic conditions rather than the more realistic dynamic conditions which affect the source of capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. es (one of the most volatile sources of revenue), as large part of the “Buffett Rule.”

The dire nature of the country’s fiscal situation, which Obama’s proposal is meant to address, will be exacerbated, not helped, by most of the proposals he put forth.

Follow David Logan on Twitter @Loganomix

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