February 14, 2011

Look beyond the rhetoric to actual budget numbers

Veronique de Rugy

Senior Research Fellow

Forget about the budget rhetoric, look at the numbers.

First there is a $1.6 trillion deficit. That figure represents the entire budget of the United States in FY1998.

The problem is that this budget, like the previous one, grounds most of the deficit reduction in revenue increases. In this case, spending would go down by $90 billion and revenue would increase by $453 billion between this year and next year.  However, Obama also would rely heavily on new taxes, to a degree unacknowledged by administration officials in recent days. His budget request calls for well over $1.6 trillion in fresh revenue over the next decade, much of it through higher taxes on the wealthy and businesses.

That’s a risky bet considering that the president doesn’t have much control over how people react to tax increases.  He can’t stop taxpayers from reacting to tax increase by working less, hiding assets, hiring fewer employees and sitting on their capital instead of investing it. This bet is akin to me continuing to spend gigantic amount of money while I am in the red just because I am assuming that I can force my boss to give me a 20 percent raise. This is not only unlikely, it will surely backfire as the economy is less likely to bounce back and grow as tax increase.

Overall, this budget is unrealistic at best and not taking us a step closer to addressing our short and long term budget crisis.