The Truth About The Obama Budget

Stanford's Michael Boskin hits the nail on the head when he describes Obama's proposed budget. Probably one of largest misconceptions about the state of the federal budget and taxes is the notion that Obama will lower taxes for 95% of Americans (ostensibly those making less than $250,000 a year). And yes, technically what Obama is proposing will not directly raise taxes on those making less that $250,000. The catch is that even though you don't directly pay the Treasury you will pay for the added cost of government under Obama. If you really ask yourself, how would you prefer to be taxed: openly or indirectly? I prefer openly simply because it is a lot easier to sneak in tax hikes if the public doesn't know they're being taxed! How is Obama secretly taxing us, you ask? First, consider one of Obama's biggest domestic policy promises - expanded health care coverage. The current government health care program, Medicare, is not funded through income taxes, but a payroll tax which falls disproportionately on lower income individuals. How could this be true? Simple payroll taxes are paid by all individuals that have a job, and by their employer, and it is a flat rate not based on income (currently ~7.65%). Since this tax is not part of your federal income tax return it is also never refunded to you in part or whole. Making it the largest tax paid by low income earners. If Obama's health care plans involve increases in these taxes they will fall disproportionally on working middle-class Americans and their employers. You may be saying to yourself "Wait a minute, no one has talked about raising the payroll tax rate." You're right Obama hasn't proposed it, but it is a logical way to pay for the health care proposals that he is pushing for - especially since most American know little about this tax. So in the interests of posterity I thought it should be mentioned, but I digress.

This brings me to the second method by which Obama is raising taxes on individuals. This one is both downright underhanded and a little complicated so bear with me. As Boskin's article points out, Obama is going to add at least $6.5 trillion, yes trillion, to the national debt. Let me put this in perspective: there are ~300 million Americans so $6.5 trillion comes out to about $21,500 per person. And make no mistake every single dollar borrowed today must be paid back by our children and grandchildren, with interest. The real kicker here is that the savings rate in this nation is less than 5%. This means that most of the trillions of dollars we are borrowing are coming from other nations. Paying interest on this $6.5 trillion isn't really a problem if most of the bonds are held by U.S. citizens because we just paying ourselves on our debt. It is the fact that we are paying interest to foreign nations that really drains wealth out of this country. It gets even better, though. As the Federal government continues to borrow the debt service becomes more and more burdensome, in turn the credit worthiness of the government begins to deteriorate. The parties buying U.S. sovereign debt demand higher and higher interest rates to offset the increasing riskiness of Treasuries. Let me be clear, the current debt load is not extreme enough to have huge impacts on the credit rating of the Federal government, but it does have small impacts. Those increases result in higher borrow costs for the U.S. government which translates into more tax dollars needed just to pay the interest (or more debt). These costs alone do affect taxpayers indirectly, but the largest impacts come from other channels. The interest rates prevailing on U.S. government bonds are the benchmark rates for most market interest rates (including the prime rate that is the basis for mortgage and auto loan rates). As the U.S. government's borrowing costs rise so do the costs for every single American. This is the real tax that we will pay for Obama's massive debt addiction. We will pay it every day on our mortgages, car loans, credit card bills, and inflation.

The scary part is that the $6.5 trillion doesn't include the trillions of additional dollars the Federal Reserve and Treasury have pledged for the economic bailout. The next time you pay your mortgage think about the real cost of all this debt and whether it is worth it or not.