In the span of seven months, President Obama has offered three different budget plans for the federal government. He offered an actual budget in February, a budget "framework" in April, and yet another tax-and-spend plan this past week (more spending in the "American Jobs Act"; more taxes in a new plan unveiled yesterday). Unfortunately, none of these approaches has provided the kind of leadership that America needs to lift the crushing burden of debt while promoting sustained economic growth.
The following House Budget Committee analysis unpacks the President's widening credibility deficit "“ on taxes, spending, debt, and gimmicks.
Tax Hikes on Job Creators: Contrary to claims of "balance," the President's latest tax-and-spend plan is dominated by higher taxes. Not including war spending and estimated savings in debt-service costs, 80 percent of the deficit-reduction claims take the form of higher taxes. At a time when economic growth remains stagnant and private-sector job creation remains elusive, the President's calls for tax increases are deeply misguided.
Doubles Down on Health Care Rationing: This Administration's misguided approach to health care spending is most evident in its doubling down on the President's new health care law. Instead of offering a plan to save and strengthen critical health and retirement security programs so that government can keep its promises to current and future generations, the proposal claims that 90 percent of its Medicare savings will come from the same kinds of price controls that have failed in the past. If tried on the scale that the President wants, these restrictions would result in reduced access and denied benefits for current seniors.
Lack of Credibility Reveals Deeper Flaws: Rebutting criticism of a plan marked by divisive substance and marketed with partisan rhetoric, President Obama said yesterday: "It's not class warfare. It's math." The President's comments demand attention to the numbers. And the numbers underscore this President's lack of fiscal seriousness. Because of empty promises made by politicians of both political parties, the federal government faces tens of trillions of dollars in unfunded liabilities. The President has called for even higher taxes and deeper Medicare cuts "“ yet "math" reveals that he is still not being honest with the American people on what will be needed to seriously confront our looming fiscal crisis.
The unavoidable truth of the matter is that this President remains wedded to an unsustainable trajectory of government spending. The tax increases and Medicare price controls he has proposed are insufficient to match the spending he's promised.
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The Merciless "Math"
The President insists that his demands for tax increases on 0.3% of the population are not driven by ideology, but rather by "math." In his remarks in the Rose Garden yesterday, he continued: "The money has to come from some place." So let's examine the "math":
From a pure numbers perspective, there is not enough income at the top of the earnings scale to solve our fiscal challenge over the short or long term. The top 3 percent of earners, those making $250,000 or more, have about $2.3 trillion in total annual income[1]. Even if we confiscated that money with a 100 percent tax rate, it would only fund the government this year for just over six months. The 400 wealthiest Americans have a combined net worth of about $1.4 trillion "“ confiscating that income would fund the government for about 4.5 months[2].
Going after "the rich" ensnares successful small businesses which pay taxes at the top individual rates (50 percent of small-business profits are taxed at the top two individual tax rates). Raising taxes on these small businesses hinders economic growth and job creation "“ small businesses account for roughly two-thirds of net new jobs. While it's never a good idea to raise taxes on successful job creators, this strategy is especially troubling in the current slow-growth/ high-unemployment economy.
Top tax rates are already set to climb much higher by virtue of the President's health care legislation. In 2013, when economists tell us the unemployment rate will still be above 8.5 percent, the Administration's tax policy would push the top effective tax rate to 44.8 percent from its current level of 35 percent.
Figure 1
Even if tax revenue as a share of the economy were to grow in excess of its historical average, tax increases simply cannot match the spending commitments of the federal government in the years ahead. Based on Congressional Budget Office (CBO) projections of their likely policy trajectory, government spending is on pace to double within a generation, and eclipse 75 percent of the entire economy later this century (see Figure 1). As the Washington Examiner's Philip Klein observed: "No amount of rhetoric by [President] Obama is going to change the numbers."[3] In other words: "It's math." Each year government spending continues to outpace revenue, the federal government must borrow the difference. These annual budget deficits add to the national debt. On the current path, CBO projects that debt held by the public will overwhelm the entire economy within the decade.[4] While an economic crisis would hit far earlier, the current trajectory has debt rising above 800 percent of Gross Domestic Product (GDP) in CBO's long-term forecasts.[5] As economists have made clear, this debt overhang not only threatens the next generation, but severely impairs economic growth and job creation today (see Figure 2). [6]
Figure 2
The federal government's debt challenge is a function of the explosive growth of entitlement spending, specifically the health care entitlements: Medicare, Medicaid, and most recently trillions of dollars of additional obligations stemming from the enactment of the President's health care law (see Figure 3).
Medicare, Medicaid, and additional government health spending programs will soon eclipse all other government spending. According to Figure 4, non-health related government spending as a share of the economy is on pace to slowly decline in the decades ahead, while government's spending on health care as a share of the economy explodes.
Currently, health care spending is growing twice as fast as economic growth. General revenue required to finance Medicare is expected to grow from $280 billion in 2011 to $468 billion in 2021. In future years, total federal health spending is expected to grow from 5.6 percent of GDP to nearly 20 percent of GDP "“ almost equal to the post-World War II average for the entire federal government. This is clearly unsustainable.
The exploding cost of health care is bankrupting the country, yet among the primary drivers of health inflation is the structure of the government's open-ended health care entitlement programs.
Decades of Medicare price controls have failed to control spending. Instead of cutting costs, they encourage providers to bill for more services each year. Many experts "“ from both sides of the aisle "“ believe that the Medicare Fee-For-Service (FFS) system is a major reason for the explosion of costs in American health care. Figure 3
Medicare reimburses providers for their services without question, without concern for quality and without thought to cost. This top-down delivery system exacerbates waste in the health care system, as none of the primary stakeholders has a strong incentive to reduce waste.
Politicians' repeated efforts to patch this problem without reforming the structure of the subsidy have amounted to one failure after another. Time and again, Congress has sought to apply band-aids by reducing the rate at which doctors and hospitals are reimbursed for treating Medicare patients. These repeated fee reductions have had two consequences: Providers have either increased the volume of services they provide for each condition, leading to waste, fraud and abuse; or they have stopped accepting Medicare patients, limiting access for seniors.
Despite these misguided interventions, the rising cost of Medicare continues unabated. Today, Medicare spending is growing at a rate of 7.2 percent every year. This is more than twice the rate at which the nation's economy is growing. The unchecked growth of the Medicare program threatens not only the federal budget, but also, more critically, the very health security of millions of American seniors. In testimony before the House Budget Committee, Department of Health and Human Services Secretary Kathleen Sebelius made clear: "I would say that the current fee-for-service system, yes, is unsustainable."[7]
Figure 4
Another major health care entitlement "“ Medicaid "“ has fallen victim to the same trend: an open-ended commitment that drives up costs, coupled with misguided price controls that restrict access. There is no limit on the federal government's matching contributions to state spending, so state governments "spend most of their energy devising ways to "?maximize' how much they get from the federal government," while seeking to minimize their own share of the tab.[8] The program's mandates and misaligned incentives have driven up spending at such a rate that Medicaid is now estimated to replace elementary and secondary education as the largest component of total state spending. In an effort to restrain costs, policymakers have sought to reduce payments to providers, resulting in Medicaid beneficiaries finding it increasingly difficult to find access to quality care.
The structural problems with Medicare and Medicaid, along with the discriminatory tax treatment of health insurance, all serve as key contributors to health inflation. The failure to reform these government policies has pushed affordable coverage out of reach for millions of Americans, eroded workers' paychecks for those with coverage, and exacerbated the fiscal challenges at the federal, state, and local levels of government.
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The President's Health Overhaul Makes Matters Worse
Despite being sold as a serious attempt to tackle the problem of health inflation, the President's health care law was anything but. Its primary focus was on expanding coverage via government subsidies, instead of making coverage more affordable with reforms that promote competition and choice. With its maze of mandates, dictates, controls, tax hikes and new entitlements, the flawed new law will push costs even further in the wrong direction:
Already, providers have announced big premium hikes related to the law's new mandates.[9]
Given the law's warped incentives, experts have warned that it makes more economic sense for employers to simply drop health insurance coverage for their employees.[10]
Thousands of firms and organizations have sought waivers to escape the law's onerous mandates.[11]
At a time when job creation is desperately needed, the law imposes $800 billion of new taxes.[12]
Instead of repairing Medicare, the new law raids Medicare of over half a trillion dollars and spends that money on new health care entitlements.[13]
The new law empowers a panel of bureaucrats to cut Medicare spending in ways that will jeopardize seniors' access to care.[14]
The law dramatically expands a Medicaid program that is already failing its beneficiaries,[15] breaking state budgets,[16] and adding to a growing flood of red ink at the federal level.[17]
The President and his party's leaders are deeply committed to the bureaucratic vision of health care represented by their new health care law. They have greeted efforts to move federal health care policy in the direction of greater competition and choice with demagoguery and derision. It remains difficult to build bipartisan health care reform on top of a partisan health care law. Because of the Democrats' intransigence on health care, their "grand bargain" proposals usually sidestep the politically difficult question of how to control government spending on health care. Too often, efforts to chart a sustainable fiscal path rely on artificial savings targets, as opposed to actual policy reforms that would reduce health care spending in the future.
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The President's Latest Budget Plan: Strike Three
The President remains firmly wedded to his unaffordable vision on health care. Unwilling to consider approaches that deal with the root drivers of health inflation, his budget proposals are unable to conform to basic math. There is no degree of taxation that can match the spending promises made by this Administration without inflicting irreparable economic damage. Government spending as a share of our economy is on pace to double by mid-century, and will consume 75 percent in the decades to follow.
The Misguided Approach on Health Care
Instead of proposing much needed reforms to health entitlement programs, the President instead doubles down on the top-down price controls from his health care plan.
The President's health care law already cut well over $500 billion from Medicare for current seniors "“ and the President is again seeking to impose cuts on doctors and other healthcare providers that will further restrict patient access to care. His proposal strengthens the government-rationing board, known as the Independent Payment Advisory Board (IPAB), giving this board of fifteen unelected bureaucrats even more authority to slash Medicare spending and reduce access to care for seniors enrolled in Medicare today.
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