Remember how public anger over the federal debt reaching new sky-high levels last year drove lawmakers into a flurry of discussions about budget controls? Responding to public and international pressure to do something about permanently spiraling deficits, President Obama established a flawed commission to tackle the spending problem. Congress, doing its part, voted for a massive $1.9 trillion increase in the debt limit to $14.3 trillion. That increase was so large it would allow them to spend freely during this election year without upping the limit on the federal credit card again. What’s more, they could use the Obama’s commission as a figleaf of cover towards fiscal responsibility. Bad enough, right? But the real story behind the nation’s debt is far worse.
The debt limit is comprised of two types of debt: debt held by the public and debt held by other governmental entities like the Social Security Trust fund. This measures money lent to the federal government by others as well as money lent from one part of the government to another. But there is much more the taxpayers are on the hook for and it can be found in the Annual Financial Report of the United States Government. The recently released report for 2009 shows that total liabilities are $14.5 trillion, more or less equal to the debt, but up $2.3 trillion from 2008, driven by spending on TARP and declining revenues and tax cuts for low income Americans. However, the long-term excess costs from burgeoning entitlement costs like Social Security and Medicare are $45.8 trillion, up $2.9 trillion – a far larger increase. Along with other commitments and contingencies, the total obligations of the U.S. Government total $63.3 trillion, or $63,300,000,000,000.
If that makes your eyes glaze over, this represents a debt burden of $200,000 for every man woman and child in America. It is a $16,000 jump over last year. This is the real debt that Washington doesn’t want you to know about. This is the real debt that Congress must immediately get serious about. So when Congress passes new spending bills or a massive new entitlement benefit like the health care bill now being debated, they should tell the taxpayers – present and future- how it will affect this real debt – $63.3 trillion, $200,000 for every American.
The health care plan President Obama recently released is mostly a combination of the different plans passed by the House of Representatives and the Senate. But in one major way it breaks with long-standing precedent, proposing a fundamental wrong-headed change to both entitlement policy and tax policy. He proposes for the first time to tax capital income to support entitlement programs.
Payroll taxes have always applied just to wages and salaries and the revenue those taxes raise has gone solely to pay for entitlements like Social Security and Medicare. The deal has always been that we pay payroll taxes during our working years and receive the benefits they fund after we retire. President Obama’s health care plan would shatter this compact forever.
The Hospital Insurance (HI) portion of the payroll tax is 2.9 percent on all wages and salary that is paid half (1.45 percent) by workers and half (the remaining 1.45 percent) by employers. It is supposed to pay only for the hospital insurance portion of Medicare benefits that retirees receive. President Obama’s plan adopts this break with long-held policy and doubles down by further severing the link between HI and Medicare benefits. Obama’s plan not only increases the HI tax on wages and salaries for high-income earners similar to the Senate bill, it also applies the HI tax to investment income for the first time. Obama’s unprecedented plan would levy the current 2.9 percent HI tax on what the administration obnoxiously refers to as “unearned” income, which includes capital gains, interest, dividends, annuities, royalties and rents for families earning more than $250,000 a year ($200,000 for single filers).
Applying the HI tax to investment income would also continue to transform entitlements and how they are paid for. Using the revenue raised by levying the HI tax on investment income would open the floodgates for future rate increases to pay for other new spending programs. Adding a new revenue stream for Congress to tap when it needs more money is always dangerous and should be resisted at all costs, otherwise expanding government will be too easy for Congress.
Yet this is likely the reason President Obama wants to levy the HI tax on investment. Applying the HI tax separately to investment income will forever give Congress yet another tax to hike whenever it wants to fund a new program. If Congress can raise payroll taxes easily to pay for any spending it desires, payroll taxes will no longer be used to pay for entitlements, but as an ATM for Congress to go back each time it needs more cash.