Friday, March 19, 2010

How Does a $940 Billion Cost Become a $138 Billion Deficit Reduction?

I never understood the new math, but this is byzantine. It’s Congressional math by a Congress with no sense of economics or even Aesop’s Fables. Once upon a time, Senator Everett McKinley Dirksen said: “A million here, a million there, pretty soon you’re talking real money.” A billion here, and a billion there, and we have trillion dollar deficits.

The reality here is that the $940 billion is based on false assumptions, creative accounting, false accounting, material omissions, and the budgetary tricks that are bankrupting California.

The CBO had to score the bill on the assumptions presented to it by Congress. Note though that to the credit of the CBO, it stated the figures were only preliminary and final figures could not be provided without knowing what was in the final Bill.

To begin with, the health reform act only looks solvent because most of the expenditures do not begin until 2014, but the tax increases begin immediately. In other words, ten years of crippling taxes are needed to fund four years of underestimated expenditures.

Second, the CBO has long engaged in static analysis. If tax rates are raised 5%, the CBO assumes that revenues will rise 5%. They do not account for human behavior. People, especially businesses, adjust their income, behavior, and their expenditures to minimize taxes. The CBO should have looked at the experiences of Tennessee and now Massachusetts to realistically score the Bill.

For example, experience tells us that the best way for government to increase capital gains tax revenues is to lower capital gain tax rates. President Obama has expressly rejected that reality by proposing to raise the tax rate as a matter of “fairness.” Fairness will include a tax rate of 42.8% on dividends. Watch the rich hunker down, and reduce their capital gains, dividends, and taxable interest income.

Further, one of the critical lessons from the Great Depression was that raising taxes during an economic recession, much less depression, further depresses the economy.

The new tax increases include taxing and raising taxes on capital, which will have a crippling effect on economic activity. The result will be Eurosclerosis. Liberals view capital gains, dividends, interest, annuities, rents and royalties as “unearned income.” These are the funds for investment. Taxing them reduces investment. Even more jobs will be exported.

The only employment gains will be in 16,500 new IRS agents to enforce the law, especially the compulsory insurance mandate, other federal bureaucrats, and the construction industry in the Washington, D.C. area.

Caterpillar announced that the new bill will cost it $100 million in the first year. The company competes in the global marketplace. To remain competitive it will force its employees to shoulder more of the cost, cut its retirees, or move more production offshore.

Every major manufacturer will face that quandary. The solution, employer by employer, will be a drag on our fragile economy.

Third, the $940 billion is purportedly funded through tax increases and programmatic cuts. The tax increases will not materialize as projected, and the cost savings will vaporize. For example, over $540 billion is scheduled to be cut from Medicare, including a 21% cut in physician reimbursements. That will not happen. Indeed, a bill is drafted to restore the physician reimbursements to preclude more doctors from bailing out of the program. The CBO estimated that the $200 billion “doctor fix” will add $39 billion to the deficit.

It also includes projected savings from nationalizing federally guaranteed student loans. That too won’t happen as Congress spends these sums elsewhere. these "savings" have already been cut from $87 billion to $61 billion.

Fourth, history tells us that Congress also expand entitlement programs after initial enactment. Speaker Pelosi has already promised that with the health care bill.

Fifth, perhaps the greatest cost increase isn’t even in the bill, but may be the next great Congressional battle. Undocumented immigrants are excluded from the bill’s coverage.

President Obama has promised the Hispanic Caucus that he will now move on Immigration Reform. If the undocumented immigrants are provided legal residency status, then they and their extended families will be eligible for benefits under the view. Regardless of your views on the 15-30 million undocumented immigrants in America, legalization will result in a budget buster.

Finally, everything is subject to change after the November elections.

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