"The Senate Budget - Is the Individual Being Marginalized?"

Sydney M. Williams

Thought of the Day

“The Senate Budget – Is the Individual Being Marginalized?”

April 30, 2010

Keeping with the partisan atmosphere in Washington, last week the Senate Budget Committee passed a fiscal 2011 budget resolution on a party line vote of 12-10. While this is a non-binding proposal, it suggests the direction the Administration wants to travel and it raises taxes dramatically on dividend income for those in the highest tax brackets, which will have consequences for those in lower brackets.

The report prepared by the majority staff highlighted the expectation that the deficit, as a share of GDP, will drop from 9.8% to 3.0% – a 70% decline over five years. It also emphasizes that the budget provides net tax relief of $780 billion over the next five years, “targeted largely to the middle class.”

Senator Judd Gregg, ranking Republican Senator on the Committee, had a different take: “Both Social Security and Medicare go into negative cash flow in the term of this budget. For the last twenty years (and more), we’ve used the Social Security funds and Medicare funds to fund the general operations of the government, rather than borrowing from the public. We can’t do that again.” Taxes will go up, not down. Using the data from Wikipedia, entitlement spending (Social Security, Medicare and Medicaid) will amount to $1.168 trillion in 2010. Social Security and other payroll taxes will generate $940 billion, implying a shortfall of $228 billion. Instead of generating cash that could be used to purchase Treasuries, the data suggests payments will have to be made with borrowed money.

Interest expense on the national debt is forecast to be $164 billion, implying an average annual interest cost of 1.26% on debt of $13 trillion. Does anyone believe that interest rates will not rise over the next year or so? It is hard to imagine such a scenario, unless we are headed back into recession and corporate and individual demand for money shrinks materially. It is more likely that inflation will result from a cheapening Dollar and interest costs will rise materially.

To pay for these entitlements – and the newest entitlement, the new healthcare plan – taxes will go higher, most likely significantly more than we have been led to believe. On Thursday, the Wall Street Journal, in an editorial, pointed out that the tax on dividends, as proposed in the Senate’s budget resolution, for those in the highest brackets, will rise to 43.4% – the top rate of 39.6% plus the 3.8% surcharge on all investment income resulting from the recently passed healthcare bill – versus the current 15% rate. As I wrote on Wednesday, the tax code needs to discourage consumption, not investment. A 189% increase in taxes on dividends will serve to dissuade companies from raising dividends, thereby impacting the income of the retired and those in lower tax brackets.

Despite protestations by the Administration to the contrary, it begs credibility that a new entitlement – universal healthcare – will not add costs. Outside of rationing and improved technology, the elimination of waste is the only way in which costs will be reduced, and government has never been known for efficiency.

There is no question that there are inequities in our democratic, capitalist society: income disparities are too high; not enough children have access to good education and too many people survive with inadequate healthcare. These areas need to be addressed – incomes because of fairness; education because of opportunity and healthcare because of decency. But on balance our system has served our nation and its people well. Immigrants, for the most part, come to this Country for its freedoms and opportunities, not for its welfare. To create an environment that fosters dependency on the State ultimately dooms that State to failure. In a world in which our competition comes from around the globe, we need to encourage innovation, entrepreneurship and investment at home. We must leave behind the culture of consumerism and xenophobia, and recognize that markets are global. Our opportunity is to serve a rising middle class, in places like China, Brazil, India, Vietnam, Indonesia and Eastern Europe.

It is individuals, risk-taking, creative persons that grow and expand GDP, not the State. A sense of personal responsibility must be recognized and encouraged. Government should set the rules and umpire the games, but the athletes should be the people, free to succeed and free to fail.

I worry that the direction we are headed leads toward Statism and away from individual freedom, opportunity and prosperity.