Obama Budget: Bad News For Investors, Taxpayers, And Education Reform
President Obama’s budget was released yesterday, two months late. It’s a record $3.78 trillion, and is full of wasteful spending, but at least it doesn’t contain a trillion dollar deficit, like his prior budgets. (This time, the projected deficit is less than $800 billion. If adopted, Obama’s budget “would increase spending by $154 billion.”)
It contains a cap on IRA’s, which is a bad omen for savers. As Time magazine notes, it “proposes to cap tax-advantaged savings across all accounts at $3 million in order to raise $9 billion over 10 years,” curbing
the savings ability of self-employed professionals like doctors and lawyers. As these business owners reach the cap, and there’s nothing left in it for them, they might shut down or reduce plans that benefit their employees. The cap proposal is a clear play to unlock some of the $10 trillion sitting in IRA and 401(k) accounts, which have become the primary retirement savings vehicles in America. . . .What’s next? Taxing the growth in Roth IRAs?. . . It’s not clear how the IRA cap would be enforced. Would savings beyond $3 million be disallowed? Or taxed right away? If you already have more than $3 million in IRA and 401(k) accounts, might you be forced to take immediate taxable distributions? Would Roth IRAs and traditional pensions be included under the cap?
The Obama budget contains big increases in spending on Early Head Start, even though neither Head Start nor Early Headstart works. America already spends more money on K-12 education than all countries except for a few extremely wealthy nations like Luxembourg and oil-rich Norway, and it spends a higher percentage of its GDP than the vast majority of countries. As the Cato Institute’s Andrew Coulson notes, the Obama administration has ignored “the mounting evidence that the federal government’s own preschool programs, Head Start and Early Head Start, have essentially no lasting benefits. Though candidate Obama once said he would terminate ineffective programs, his latest budget retains them both, and actually grows Early Head Start. Additionally, the new budget would subsidize PreK programs like those in Oklahoma and Georgia that advocates have long touted as ‘high quality.'” Never mind that “relative to the national average, Oklahoma has seen modest declines on the 4th grade NAEP tests.”
High student debt poses a risk to the economy, notes the Federal Reserve. But the Obama budget perpetuates perverse federal financial aid policies that encourage colleges to jack up tuition, driving up student loan debt that now exceeds $1 trillion. One such policy is income-based payment plans that do nothing to cut student loan payments of prudent borrowers, but encourage colleges to increase tuition. They do this by effectively capping the lifetime payments of imprudent borrowers who attended low-quality colleges with high tuitions, and writing off their loans at the end of 20 years (10 years if they go to work for the government), regardless of how much the colleges increase their tuition, or how few of their students get decent jobs. Taxpayers, many of whom “work in lower-paying jobs than their degreed compatriots,” will pick up the tab for the written-off loans. Even the liberal New America Foundation calls federal programs like Pay As You Earn a “huge giveaway to” undeserving and imprudent borrowers, as its Jason Delisle explained in an interview with Bloomberg Businessweek.
Bad news for shareholders is buried in the Obama budget, since it projects big declines in corporate income in future years. This will exacerbate the fact America already has higher corporate taxes, and higher investment taxes on shareholders than most countries. (In addition to income taxes, corporations also pay a disproportionately large share of America’s property taxes. Mitt Romney would pay less in taxes if he lived in Canada or many European countries, which would tax his investment income less than America does.)
The Obama budget also contains a “Buffett rule” tax increase “on millionaires who earn long-term capital gains, as Alan Viard of the conservative American Enterprise Institute has explained. The downside of the Buffett Rule, according to Viard, is that it might discourage capital investment and increase reliance on debt financing.”
Third-rate law schools benefit disproportionately from the poorly-conceived financial aid programs perpetuated by Obama’s budget, such as income-based repayment programs, since law school tuition is funded disproportionately by student loans, loans graduating low students at lower-tier law schools will not be able to pay off if they pay just 10 percent of their income for 20 years. As the ABA Journal notes, “Law students . . . are treated generously as future professionals and able to borrow, with virtually no cap, significantly more money than undergrads.” Meanwhile, law school tuition has risen nearly 1,000 percent after inflation over the last half-century. As law professor Brian Tamanaha notes, at 20 expensive low-tier law schools, most students never will be able to fully repay their student loans, since they won’t find good jobs. Under income-based repayment programs, the federal government will write off much of these foolish law students’ loans, and they will not even have to repay what they are capable of paying, since their payments will be limited to less than 10 percent of their income. (Instead of cutting spending — one fourth-tier law school pays its dean $867,000 per year — these law schools will respond by increasing tuition even faster, since the increased tuition will largely be paid by the American taxpayers when the borrowed tuition is later written off. All to subsidize low-quality law schools that are in many respects harmful to the nation’s economy.)
Obama’s budget for the Pentagon wrongly ignores the sequester and puts off cost savings, rightly “calls for a new round of base closures,” and “the termination of at least two weapons systems,” and dubiously calls for “continued funding of the F-35 Joint Strike Fighter project” despite its massive cost overruns. It basically pretends that the automatic budget cuts contained in the sequestration never happened. As The Washington Post notes, its “biggest pitfall may be that it was drawn up under the assumption that automatic cuts mandated by Congress will somehow be averted by the end of this fiscal year, an assumption that analysts called foolhardy.” The Pentagon budget also reportedly contains a few “cuts to health-care benefits,” but not nearly enough to get skyrocketing Pentagon health spending under control. We can cut military spending substantially without undermining national security. Here are some examples. The Cato Institute has identified billions in additional savings that can be made at the Pentagon. To get the deficit under control, we also need to cut skyrocketing welfare spending, eliminate agricultural subsidies, and reduce wasteful education spending.