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Businesses would also see their tax burdens increase. Obama plans to raise $353 billion over 10 years through 13 different taxes (new or old). For instance, his budget reinstates superfund taxes, repeals manufacturing tax deductions for oil and natural gas companies, increases the geological and geophysical amortization period for independent producers to 7 years, and eliminates the advanced earned income tax credit.
He also proposes to create a new $112 billion tax over the next decade on the energy use and production of every American. This "cap and trade" program is designed to battle global warming by forcing companies to buy permits if they wish to emit heat-trapping pollutants. The permits will be auctioned to businesses beginning in 2012. The money raised will help pay for an extension of the Making Work Pay tax credit originally introduced in the stimulus bill.
However, the controversial nature of the proposal raises the question of whether these revenues will ever materialize.
For several weeks now the president has been emphasizing that he will "restore honesty and accountability" to the budget process. And his budget proposal for 2010 does indeed abandon some of the budget tricks of previous administrations.
For instance, Obama's first budget does not assume that the alternative minimum tax (AMT) will generate billions in revenue. The AMT is a parallel tax system enacted in 1969 to prevent a handful of wealthy individuals from using tax shelters to avoid paying any income tax. Today, this tax hits millions of households and penalizes families with children living in states with high income tax rates. Under Bush’s budgets, the president proposed a one-year patch of the AMT to neutralize its effects on taxpayers, yet he would assume the revenue for the following years in order to reduce the projected budget deficit.
Obama is also making good on his promise to stop relying exclusively on supplemental bills to fund predictable costs like the wars in Iraq and Afghanistan and the cost of disaster responses. This is a clear improvement over the previous administration.
The United States spent about $190 billion on the wars in Iraq and Afghanistan in 2008. Obama expects that the costs of the Iraq and Afghanistan wars will total just over $140 billion this year. Half of that money has already been appropriated by Congress. Supposedly, the president will make one final “supplemental” budget request to Congress for an additional $75 billion to cover war costs for the rest of 2009.
The main assumption in the defense budget is that the cost of the wars will be $130 billion in 2010 and that it will drop sharply after that, to $50 billion annually beginning in 2011. Are these assumptions realistic? Maybe. If Obama does withdraw troops from Iraq over the next 18 months or so, we will see the cost of the war drop for sure. Yet he is ramping up the U.S. military effort in Afghanistan, which will cost money. The question is how much? And how long will it take him to shove the cost of the war (or other spending projects) back into supplemental spending bills, which typically get much less scrutiny from the public, the press, and Congress?
Despite some improvements from the Bush budgets, Obama’s plan is far from being free of tricks. First, while he told Congress on Tuesday that his budget team has "already identified $2 trillion in savings" over the next decade to help tame record budget deficits, one would be hard press to actually find any programs getting cut. In fact, it appears that about half of the "savings” come from his proposed tax increases. He plans on reducing the deficit by $639.7 billion over 10 years with only his income tax increase and a $311 billion reduction in the debt service.
More importantly, the budget “saves” hundreds of billions of dollars by not continuing to spend $170 billion a year in Iraq until 2019. Obama includes war spending in his baseline projections to be able to show a $1.49 billion savings over 10 years. Yet even under the previous administration we were supposed to be out of Iraq by 2012. It's highly dissembling to say we can get savings by cutting spending that isn't actually going to occur.
The bottom line is that there is very little to be happy about in Obama’s first budget. It simply expands the Bush policies of bigger government and increased centralization, which threatens to permanently transform America’s culture and economic outlook by making more and more Americans dependent on government.
Veronique de Rugy is a columnist at Reason magazine and an economist at the Mercatus Center at George Mason University.