Just the Facts: Everything You Need to Know About Obama's Budget

President Barack Obama released his 2013 budget proposal yesterday. "This Budget is a step in the right direction," he wrote in the introduction. "And I hope it will help serve as a roadmap for how we can grow the economy, create jobs, and give Americans everywhere the security they deserve."

But that's where the easy reading ends. The rest of the proposal is a mammoth 251 pages of tables, charts, footnotes, appendixes, assumptions, and calculations. Some items are mandatory, others discretionary. Some departments are sub-departments of other departments, making it easy to double count and undercount. Phrases like "discretionary cap adjustment" are used liberally. It's not written with the average American in mind.

After reading about a dozen articles analyzing the budget, I was miffed that none offered a simple table showing how much money the proposal wants to spend, and where. So I did just that, with a little context:

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Source: White House, Federal Reserve, author's calculations.

As a percentage of GDP, safety-net programs like Social Security, Medicare, and income security are all above the long-term average -- due mainly to a weak economy and an aging population -- while defense spending is actually below average. All other budget categories are about in line with historic norms, if not below. That's an important point that often goes misunderstood: The majority of government spending that is currently in excess of historic averages is on programs that are very popular with voters, like Social Security. As The New York Times reported this week, about half of Americans live in a household that receives government benefits.

So that's spending. What about taxes? Here's what Obama proposes:

Tax Category

Tax Revenue, 2013

As a percentage of GDP, 2013

Average Percentage of GDP, 1960-2012

Individual income $1.4 trillion 8.3% 8.1%
Corporate income $348 billion 2.1% 2.3%
Payroll (social insurance) $959 billion 5.9% 5.6%
Excise $88 billion 0.5% 1%
Other $147 billion 0.9% 0.9%
Total $2.9 trillion 17.8% 17.9%

Source: White House.

Total taxes are as a percentage of GDP will still be below the historic average in 2013 -- and even that relies on an assumption that various tax proposals like allowing the Bush tax cuts on high-income earners will be allowed to expire. Politically, that's probably not going to happen. And without those reforms, deficits will be much wider. Current tax revenue is far below normal, totaling 15.4% of GDP. If tax revenue were at a historic norm, the budget deficit would be $400 billion lower this year, erasing about one-third of the shortfall.

The budget also has dozens of specific proposals. A few notable ones:

  • Obama proposes replacing the alternative minimum tax with a new tax called the "Buffett rule," named after Warren Buffett. Under the Buffett Rule, no one making more than $1 million a year will pay less than 30% in federal income tax. The rule is designed on the grounds that "no household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay," the plan writes. But very few households currently pay over 30% of their income as federal taxes, and those that do are not exactly middle class. According to the Tax Policy Center, about 99% of tax filers have tax rates below 30%.
  • As mentioned, Obama's proposal would let the 2001/2003 tax cuts expire on households making more than $250,000, reverting back to tax rates of the late 1990s. "This would reduce the deficit by $968 billion over 10 years," the proposal says. Dividends would also be taxed as ordinary income for those making over $250,000 a year, and capital gains would be taxed at 20%, both up from a current maximum of 15%.
  • Hedge fund managers and private equity managers would lose the "carried-interest" loophole that lets them count labor income as a capital gain, currently capping their income tax at 15%. Ending this loophole is supported by pretty much everyone except those who benefit from it.
  • The U.S. Patent and Trademark Office would be allowed to keep its fee collections rather than turning over a portion to Congress. It could then use this money to overhaul the patent system, which is badly in need of repair, holding back by its own count "millions" of potential jobs.
  • A massive, $476 billion transportation package would take place over six years -- 80% more than was spent on transportation in the last six years. One of the program's goals is to "provide 80 percent of Americans with convenient access to a passenger rail system, featuring high-speed service, within 25 years." The plan would be paid for using "savings from ending the war in Iraq and winding down operations in Afghanistan."

There's much more in the proposal, but this covers the important stuff. Keep in mind, this is merely a proposal. Most of it will probably never become law. Budget forecasts are the ultimate lesson in taking things with a grain of salt.                                              

What do you think about the budget? How would you fix it if you were in charge? Sound off in the comment section below.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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