Ryan Ellis

Initial Thoughts on the New Obama Budget

Posted by Ryan Ellis on Monday, February 1st, 2010, 1:16 PM PERMALINK

A few early thoughts on the  FY 2011 Obama budget:

  • It's important to keep the 30,000 feet view in mind. The top-line estimate for taxes, spending, and debt over the next decade can be found in Table S-1:

    Taxes are scheduled to rise from 14.8 percent of GDP in 2009 to 19.6 percent by 2020 (the historical average is 18 percent). 

    Spending is scheduled to fall from 24.7 percent of GDP in 2009 to a still-high 23.7 percent of GDP in 2020 (considering the historical average is 21 percent, this is actually a very significant and permanent increase in the size of government).  When Bill Clinton left office, for instance, federal spending was 18.2 percent of GDP and falling.

    The national debt is scheduled to rise from 53 percent of GDP in 2009 to 77.2 percent of GDP in 2020.  As a percentage of the economy, the national debt hasn't been that high since 1950.
  • So, taxes are scheduled to be higher than their historical average.  Spending is scheduled to be higher than its historical average.  If you have a problem with the deficit, it's not because taxes are too low--it's because spending is too high.  The culprit is clearly spending, not taxes.  The deficit is signaling to policymakers that they are spending far more money than they should be.
  • In the terminations and reductions section (page 4), the budget includes some energy tax hikes along with actual spending cuts.  Tax increases ARE NOT spending cuts.
  • In the coming days, ATR will be breaking out different analyses of the budget, including the international tax hikes, the energy tax hikes, the small business tax hikes, the tax hikes disguised as "compliance," and the tax increases on families making less than $250,000.  We'll also be looking at the various spending questions via our Center for Fiscal Accountability.

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State of the Union Myth/Fact:<br> Government-Run Healthcare

Posted by Ryan Ellis on Thursday, January 28th, 2010, 3:42 PM PERMALINK

MYTH:      “[My health plan] would give small businesses and uninsured Americans a chance to choose an affordable health care plan in a competitive market.”

FACT:    The Obama-Reid-Pelosi plan would actually increase health premium costs for the uninsured.  The average individual health insurance premium today is $2985 for singles and $6328 for families.  According to the non-partisan Congressional Budget Office, the average premium will increase to $5800 for singles and $15,200 for families under the Obama plan by 2016.  This is 10 to 13 percent higher than they would be under current law.  Only those individuals earning less than about $40,000 and families earning less than about $85,000 would receive any tax or spending benefits to even partially-offset this increased cost.  Those earning more than this get no help whatsoever.

For small businesses (“small group plans”), today’s average premium is $4155 for singles and $10,956 for families.  Under the Obama-Reid-Pelosi plan, this increases to $7800 for singles and $19,200 for families by 2016, a 1-2 percent increase over current law.  Only about 12 percent of people receiving coverage from their small business employer would benefit from the small business health tax credit.

MYTH:    “[My plan] would require every insurance plan to cover preventive care.”   

FACT:    Under current law, someone can’t wait until they are sick and then sign up for health insurance.  That’s called “gaming the system.”  Insurance only works if healthy people are paying premiums each month, so that when you get sick or go to the doctor, money is there for you.  If healthy people can wait to buy coverage, the entire insurance model falls apart very quickly.  Put simply, “guaranteed issue” would be the death of insurance.

MYTH:    “Our approach would preserve the right of Americans who have insurance to keep their doctor and their plan.”

FACT:    The Obama-Reid-Pelosi plan taxes your current health insurance, if it’s deemed to be a “Cadillac plan.”  It also puts in place minimum coverage requirements in order to remain “qualifying,” which probably will alter your plan.  It probably will make it impossible to design health insurance plans which are HSA-compatible.  Clearly, you simply can’t keep your current plan under this bill.

MYTH:    “According to the Congressional Budget Office – the independent organization that both parties have cited as the official scorekeeper for Congress – our approach would bring down the deficit by as much as $1 trillion over the next two decades.”

FACT:    According to CBO, these cost estimates only pan out if Congress is willing to cut Medicare provider reimbursements, something everyone knows will never happen.  Budget savings based on phony, never-going-to-happen spending cuts are bogus.  This creates an unfunded liability in the program.

MYTH:    “I know that with all the lobbying and horse-trading, this process left most Americans wondering what's in it for them.”

FACT:    When the American people don’t want a massive plan of this size, margins can get a little tight on Capitol Hill.  That’s why Obama-Reid-Pelosi had to buy off members with the Louisiana Purchase, the Cornhusker Kickback, the Cadillac Compromise, and untold other backroom, closed-door deals.  Back in the campaign, candidate Obama said he would put negotiations on C-SPAN so this could not happen.

MYTH:    “There's a reason why many doctors, nurses, and health care experts who know our system best consider this approach a vast improvement over the status quo.”

FACT:    One word: money.  The American Medical Association, nursing groups, hospitals, and others are receiving billions in taxpayer subsidies under this bill.

MYTH:    “If anyone from either party has a better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors, and stop insurance company abuses, let me know.”

FACT:    It’s worth pointing out that even President Obama’s own plan will increase premiums, increase the deficit (at least in the real world) even while raising taxes, cover only some of the uninsured (theoretically), cut Medicare, and drive insurance companies totally out of business.  So one might first turn the question back on him.

Can President Obama, Speaker Pelosi, and/or Leader Reid use the Internet?  Can their staffs?  It appears not, since this is a common refrain easily refuted.  The fact is, there are dozens of good ideas and several comprehensive plans which have been proposed.  The House Republicans have even aggregated all of them.  Their list doesn’t include the DeMint plan, nor does it include the comprehensive “American Roadmap” government reform plan (including healthcare) of Congressman Paul Ryan (R-Wisc.)

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State of the Union Myth/Fact:<br> Obama's New Taxes on Your 401(k)

Posted by Ryan Ellis on Thursday, January 28th, 2010, 11:40 AM PERMALINK

MYTH:    “To recover the rest [of TARP], I have proposed a fee on the biggest banks. I know Wall Street isn't keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”

FACT:    The President himself pointed out that most of the money from the bailout has been recovered from the banks.  This new “bank tax” has nothing to do with TARP—it is being assessed on banks which never accepted TARP funds (or have since paid them back with interest), and is not being assessed on TARP recipients who still owe the taxpayers money (like Government Motors).  It’s a money grab.

In fact, this new “bank tax” will be passed along by the banks to ordinary Americans.  It will be paid in the form of higher 401(k) fees, higher bank fees, higher mortgage and credit card interest rates, and lower interest rates on savings.

MYTH:    “We cut taxes for 95 percent of working families…we haven’t raised income taxes by a single dime on a single person.  Not a single dime.”

  It’s mathematically impossible to cut taxes for 95 percent of working families.  According to the IRS, fully one-third of all tax returns owed no income tax last year.  Nearly 20 percent of returns had neither an income nor a payroll tax liability.  These people cannot see their taxes cut any further.  Anything given to them is pure spending.

Obama, Pelosi, and Reid may not have raised income taxes last year, but they surely tried to.  Last year’s administration budget submission had dozens of tax hikes.  The health care legislation they are still pushing has 18 separate tax hikes.  All told, ATR has calculated that President Obama proposed or supported $2.1 trillion in tax hikes in 2009.  And let’s not forget that he signed into law a $65 billion tax hike on cigarette smokers 16 days into his administration.  The median income of a smoker is $36,000.

MYTH:    “To encourage these and other businesses to stay within our borders, it's time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.”

FACT:    Obama is no doubt referring to his tax hikes from last year’s budget.  ATR has compiled a series of one-pagers detailing his $210 billion in proposed tax hikes on American companies who have overseas income.  How raising taxes on American companies will incent them to remain in the United States is a mystery.  The reason these tax breaks are in place is to avoid double taxation of international corporate income.  To take away these tax breaks is to tell an American company that they will potentially have to pay taxes twice on the same income.  The best solution is to transition the U.S. tax code toward a territorial system (which most of the developed world has done), but getting rid of these tax breaks without doing that reform is foolish.  There’s no reason that an American company with an Irish subsidiary cannot become an Irish company with an American subsidiary.  America has a 39 percent “all-in” corporate rate.  Ireland’s is 12.5 percent.

MYTH:    “[We’re] making it easier to save for retirement by giving every worker access to a retirement account and expanding the tax credit for those who start a nest egg.”

FACT:    Candidate Obama campaigned on a “forced IRA” plan for small businesses, and President Obama continues to support it.  It would force every small business in America which doesn’t have a qualified retirement plan like a 401(k) or a SIMPLE IRA to open a salary-deferral IRA for their employees.  Some versions of this plan would also require the employer to start making salary deferrals into this IRA unless the employee opts out.  But suppose neither the business owner nor the employee wants to save in the IRA?  It would still have to be set up, at the business’ expense.  Retirement savings is a good thing, but not at the barrel of a gun.  The best solution here is personal Social Security savings accounts for younger workers, who often don’t have the after-tax income to save adequately.

MYTH:    “To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can't afford it.”

FACT:    Let’s lay out exactly what tax increases he is proposing here (leaving aside the fact that “we” are the ones who can’t afford his taxes, not the other way around):

The top two tax rates (which two-thirds of small business profits face) would rise from 33 and 35 percent today to 36 and 39.6 percent in 2010.  The return of the itemized deduction and personal exemption phase-outs would take the mathematical effective top marginal tax rate to 41.6 percent.

The top capital gains rate would rise from 15 to 20 percent.  The top dividends rate would skyrocket from 15 to 39.6 percent.  This would be a body blow to everyone’s IRA and 401(k) as the stock market priced in this new tax wedge.

Obama-Pelosi-Reid wants to raise the capital gains tax rate for managers of investment partnerships from 15 percent to 39.6 percent.  This will leave universities, charities, and pension plans holding the bag as partnership managers understandably demand a greater profit share to make them whole after-tax.

Finally, Obama is referring to repealing the “Section 199” domestic production activities deduction—but only for energy companies.  This is a targeted tax hike on one industry.  It will result in higher energy costs for all of us (companies don’t pay higher taxes—they pass them along to us as higher prices).  It’s shortsighted and counter-productive.

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Updated: How Much Does It Cost To Hire a New Federal Employee?

Posted by Ryan Ellis on Wednesday, January 27th, 2010, 3:48 PM PERMALINK

When politicians claim that they will save money by “in-sourcing” federal functions from contractors, or will respond to some new need by expanding the federal workforce, that has a cost to taxpayers.  How much is that cost?

In order to determine the cost of hiring a new federal bureaucrat, ATR has calculated the “all-in” cost of hiring a new employee.  We include salary as well as benefits, pension contributions, and payroll taxes.  We assume a 40-year federal career.  The numbers presented are both nominal and inflation-adjusted.  A COLA is assumed which is equal to the average level in the Washington, DC area for the past five years.

Here are the results for a low-cost, medium-cost, and high-cost employee:  

  Low Cost (GS-7) Intermediate Cost (GS-11) High Cost (GS-15)
Nominal $4.73 million $7 million $13.86 million


$2.73 million $4.04 million $8 million
  • The federal general pay schedule for the Washington, DC area is used
  • There are separate estimates for low-cost (GS-7), intermediate-cost (GS-11) and high-cost (GS-15) employees.  This was recommended as appropriate levels by former administration officials to give a sense of scope
  • The employee is assigned a “Step 5” in the GS table for a 40-year career.  As employees move up the GS-scale, their steps bounce up and down.
  • The five-year moving average for this locality’s COLA is 3.55%, so that is assumed to be the COLA rate going forward
  • In order to account for benefits, pension contributions, and payroll taxes, the GS dollar levels are increased by 33 percent, which was standard budgeting practice in the Department of Labor in the Bush Administration
  • The dollar value is expressed in nominal terms and after-inflation (2.5%)

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Mr. Freeze? Hardly.<br> The Fake Spending "Restraint" of Obama

Posted by Ryan Ellis on Tuesday, January 26th, 2010, 2:40 PM PERMALINK

The political media is awash in news that President Obama will propose a freeze in non-defense, non-security discretionary spending over the next three years.  This will reduce the spending baseline by $250 billion over the next decade. 

A few thoughts:

  1. Welcome to the fiscal responsibility party, Mr. President.  After a year of trillion-dollar bailouts, trillion-dollar stimulus bills, and trillion-dollar healthcare plans, it's nice to see at least a rhetorical nod toward sanity coming out of the White House.
  2. One little problem: CBO was actually projecting a decline in non-defense discretionary spending over the next few years (from $682 billion in FY 2010 gradually down to $640 billion in 2014).  It's right there in Table 3-1 of the CBO report.  The reason is all the "temporary" spending programs that were enacted the first year of the Obama Administration.  This is like the weatherman taking credit for a sunny day--it was happening anyway.  In fact, freezing this spending is actually a hike in projected spending over the next several years.
  3. The spending "restraint" is a drop in the bucket.  Let's take the White House claim on its face--that this measure will reduce total spending over the next decade by $250 billion.  CBO says that under current services, the federal government will be spending $42.9 trillion.  So even if this "freeze" is followed through on by the Congressional appropriators, the Obama-Pelosi-Reid regime will still be spending 99.42% as much as they were planning to, anyway.  Big deal.  It's like if you were planning on spending $100 on groceries this week, and instead spent only $99.42.
  4. It's awfully heroic to say that you're not going to increase spending after it just went up by 17.4 percent.  That's right: non-defense discretionary spending grew by 17.4 percent in Obama's first year.  Even if it stays at that level for the next three years, that would still be an average annual increase of 5.5 percent.  That's faster than the economy is expected to grow, and faster than wages are expected to grow.

So what's a better idea?

The freeze is not a bad concept: it just comes a year too late.  It's as if someone stumbled out of an all-you-can-eat buffet in a food coma and vowed to eat no more than that every day for the next three years.

What we need to do is back out that huge spending of 2009.  Going into 2009, non-defense discretionary spending was $581 billion.  The 2010 level (approved last year) of $681 billion should be pared back to this still-massive 2009 level.  That would require finding $101 billion in cuts in FY 2010 spending bills (something Dr. Coburn should be able to do easily), and then keeping domestic spending at $581 billion.  Oh, and it should be that way for the entire budget window.

By having a "real freeze" of $581 billion, federal spending will be almost $1 trillion less than CBO projects, which is still 97.7 percent of the spending which was going to happen anyway.  Nonetheless, this would be a real step toward progress.

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Who's Going to Pay the Bank Tax?<br> You Are.

Posted by Ryan Ellis on Monday, January 25th, 2010, 2:20 PM PERMALINK

I've written before about the new "bank tax" President Obama is so fond of these days (and even did a bit on Fox News Channel to discuss more).

One natural question is, "who will pay the bank tax?"  It's true that it's assessed on the 50 biggest banks, but surely that will be passed along to all of us.  The "bank tax" is actually one of the most regressive taxes likely to be proposed by the Obama regime.

How will we pay the bank tax?

  • Imagine opening up your bank statement every month and seeing a $1 "bank tax" surcharge in there.  Assuming about 100 million active bank accounts in America and $12 in annual fees, that alone would be enough to pay about 10 percent of the tax every year
  • Another mechanism might be to increase fees to manage 401(k) and IRA accounts.  This could take the form of fees assessed to your employer (which you never see), or 12b-1 fees on your mutual funds (which you didn't even know existed before I typed that)
  • Befuddled by all the fees and costs on your house's HUD-1 closing form?  Here's another one that might be in there.  Check for it just above "county recorder fee" and just below "water reclamation fee"

The list could go on, but I take it you see my point.  You can't force the banks to reduce their profits in order to pay this new tax.  Ultimately, the only way any business has to pay any tax is by increasing prices for what they sell.  That's exactly what's going to happen here.  It's not the banks' fault--it's the Obama Administration's fault for hiking taxes on a crippled industry in the middle of a deep recession.

Don't believe me?  Maybe you'll believe Suze Orman.

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Broken Promises: Obama's First-Year Tax Hikes On Families Making Less Than $250,000

Posted by Ryan Ellis on Wednesday, January 20th, 2010, 8:00 AM PERMALINK

Sept. 12, 2008: Candidate Obama said the following:
“I can make a firm pledge.  Under my plan, no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.” (Dover, NH) [Transcript] [Video clip]
Feb. 4, 2009:  Speaking before a joint session of Congress, Obama said:
“If your family earns less than $250,000 a year, you will not see your taxes increased a single dime.  I repeat: not one single dime.” [Transcript]
April 15, 2009: When asked if Obama’s tax pledge applies “to the health care bill”, White House spokesman Robert Gibbs replied:
“The statement didn’t come with caveats.”  (White House Briefing) [Transcript]
August 3, 2009: Gibbs reiterates Obama’s tax pledge:
“I am reiterating the President's clear commitment in the clearest terms possible, that he's not raising taxes on those who make less than $250,000 a year.”[ Transcript]
This promise has been broken again and again. 
Tobacco Tax Hike (Signed into law by President Obama on Feb. 4, 2009)
  • Small cigar tax hike ($0.65 billion)
  • Large cigar tax hike ($4 billion)
  • Cigarette tax hike ($57.3 billion)
  • Other tobacco products ($2.7 billion)
TOTAL <$250,000 TOBACCO TAXES: $64.7 billion/10 years   

Obama Budget Submission (Feb. 26, 2009)
  • Tax “carried interest” capital gains at ordinary income tax rates ($23.5 billion)
  • Codify “economic substance doctrine” ($4.7 billion)
  • Repeal LIFO accounting for inventories ($61.1 billion)
  • Eliminate advanced EITC (Only outlay effects)
  • “Cap and trade” energy tax ($624 billion)
TOTAL <$250,000 TAX HIKES IN OBAMA BUDGET:    $713.3 billion/10 years

Senate Healthcare Bill (Supported by President Obama)
  • Individual mandate tax ($15 billion)
  • Employer mandate tax ($28 billion)
  • Medicine cabinet tax ($5 billion)
  • HSA early withdrawal tax hike ($1.3 billion)
  • Special needs kids tax ($13.3 billion)
  • Raise “haircut” for medical itemized deduction to 10% AGI ($15.2 billion)
  • STRICKEN Botax--REPLACED Tanning salon tax ($2.7 billion)
TOTAL <$250,000 TAX HIKES IN HEALTH BILL:        $80.5 billion/10 years

TOTAL <$250,000 TAX HIKES IN OBAMA’S FIRST YEAR        $858.5 billion/10 years

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Obama's First Year:<br> $2 Trillion in New, Proposed Taxes

Posted by Ryan Ellis on Tuesday, January 19th, 2010, 11:51 AM PERMALINK

We often get the question at ATR, "how much has Obama supported in new taxes?"  This new study seeks to answer that question.

For the first time ever, the tax increases signed into law, as well as proposals for tax hikes made by or supported by President Obama have been pieced together.  It combines three elements:

  • The tobacco tax hike he signed into law in February 2009
  • His budget proposal, also from February of 2009, and
  • The latest version of healthcare reform, which he has endorsed

The results are shocking.  All told, these tax hikes total $2 trillion over the next decade.  This does not even count his 2010 trial balloons, such as a value-added tax (VAT) or a new bank tax.

This is more in taxes than was ever supported by any past President since World War II, even after indexing for inflation. 

Click here to read the full report.

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"Bank Tax": Another Bad Idea<br> From Administration of Bad Ideas

Posted by Ryan Ellis on Thursday, January 14th, 2010, 4:43 PM PERMALINK

By now, you've probably heard that one of the trial balloons being floated by the Obama Administration in anticipation of the State of the Union speech is a new "bank tax."

Details are still coming in, but it would apparently apply to the top 50 banks in America, and would raise $117 billion over a decade.  It would be a tax of $1.5 million for every $1 billion in certain bank reserves.

Supposedly, this is to recoup TARP funds.  Except, of course, that the tax applies to banks that never accepted TARP.  Also, the tax does not apply to some firms that received TARP (like Government Motors, AIG, etc.)  So the TARP connection is flimsy.

In addition, firms have begun paying back TARP in droves (in most cases, with healthy interest).  The Administration has at times told firms not to pay yet, which also calls into question the credibility of this being a measure to get TARP payments back.

It's also been speculated that this would be paired with a one or two-year extension of the "Bush tax cuts."  So, we're supposed to agree to new savings-killing tax hikes just to keep the current tax rules we have in place? 

All in all, it looks like another desperation power grab by an administration which has been characterized by desperation power grabs.  At some point, they're either going to have to rein in the socialist agenda, or they will find themselves in quagmires like healthcare for the next 3 to 7 years.

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Why Does Coakley Want to Raise Taxes<br> On Families with Special-Needs Kids?

Posted by Ryan Ellis on Thursday, January 14th, 2010, 1:58 PM PERMALINK

Americans for Tax Reform today challenged Massachusetts Senate candidate Martha Coakley to defend her support for a tax increase on families with special-needs children.  Coakley has endorsed the Senate healthcare bill, which contains a new cap on flexible spending accounts (FSAs)--disproportionately raising taxes on these families.

Under current law, there is no legal cap on FSA contributions.  Most people defer $10 or $20 per paycheck to pay for eyeglasses, co-payments, and non-prescription medication.  Many families, however, defer thousands of dollars per year into FSAs to pay for special needs education on a pre-tax basis.  The Senate healthcare bill’s $2500 FSA cap won’t affect typical families, but it will especially impact families with special-needs children.

“Martha Coakley supports this tax increase on special-needs kids because she only cares about, in her words, ‘getting taxes up,’ said ATR President Grover Norquist.  “Maybe she should put her loyalty to Washington bureaucrats aside for the moment and stop to consider the pain she is causing for families with special-needs children.”

If a median-income family in Massachusetts has a special needs child whose tuition is $10,000 per year, the tax benefit from deferring this money with an FSA is $3560.  Under the Coakley FSA cap, this tax benefit would decline to $890—a tax increase of thousands of dollars on a working family with high medical bills.

“In what universe does Martha Coakley live where she thinks that raising taxes on these families is a good idea?”
continued Norquist.  “Only someone who is completely detached from the everyday lives of average Bay Staters could possibly support this boneheaded tax hike.”

The provision can be found on page 1999, section 9005 of the bill.

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