Obama Budget: Bad News For Investors, Taxpayers, And Education Reform

Hans Bader @ OpenMarket.org:

President Obama’s budget was released yesterday, two months late. It’s a record $3.78 trillion, and is full of wasteful spending, but at least it doesn’t contain a trillion dollar deficit, like his prior budgets. (This time, the projected deficit is less than $800 billion. If adopted, Obama’s budget “would increase spending by $154 billion.”)

It contains a cap on IRA’s, which is a bad omen for savers. As Time magazine notes, it “proposes to cap tax-advantaged savings across all accounts at $3 million in order to raise $9 billion over 10 years,” curbing

the savings ability of self-employed professionals like doctors and lawyers. As these business owners reach the cap, and there’s nothing left in it for them, they might shut down or reduce plans that benefit their employees. The cap proposal is a clear play to unlock some of the $10 trillion sitting in IRA and 401(k) accounts, which have become the primary retirementsavings vehicles in America. . . .What’s next? Taxing the growth in Roth IRAs?. . . It’s not clear how the IRA cap would be enforced. Would savings beyond $3 million be disallowed? Or taxed right away? If you already have more than $3 million in IRA and 401(k) accounts, might you be forced to take immediate taxable distributions? Would Roth IRAs and traditional pensions be included under the cap?

The Obama budget contains big increases in spending on Early Head Start, even though neither Head Startnor Early Headstart works. America already spends more money on K-12 education than all countries except for a few extremely wealthy nations like Luxembourg and oil-rich Norway, and it spends a higher percentage of its GDP than the vast majority of countries. As the Cato Institute’s Andrew Coulson notes, the Obama administration has ignored “the mounting evidence that the federal government’s own preschool programs, Head Start and Early Head Start, have essentially no lasting benefits. Though candidate Obama once said he would terminate ineffective programs, his latest budget retains them both, and actually grows Early Head Start. Additionally, the new budget would subsidize PreK programs like those in Oklahoma and Georgia that advocates have long touted as ‘high quality.’” Never mind that “relative to the national average,Oklahoma has seen modest declines on the 4th grade NAEP tests.”

High student debt poses a risk to the economy, notes the Federal Reserve. But the Obama budgetperpetuates perverse federal financial aid policies that encourage colleges to jack up tuition, driving up student loan debt that now exceeds $1 trillion. One such policy is income-based payment plans that do nothing to cut student loan payments of prudent borrowers, but encourage colleges to increase tuition. They do this by effectively capping the lifetime payments of imprudent borrowers who attended low-quality colleges with high tuitions, and writing off their loans at the end of 20 years (10 years if they go to work for the government), regardless of how much the colleges increase their tuition, or how few of their students get decent jobs. Taxpayers, many of whom “work in lower-paying jobs than their degreed compatriots,” willpick up the tab for the written-off loans. Even the liberal New America Foundation calls federal programs like Pay As You Earn a “huge giveaway to” undeserving and imprudent borrowers, as its Jason Delisleexplained in an interview with Bloomberg Businessweek.

Bad news for shareholders is buried in the Obama budget, since it projects big declines in corporate income in future years. This will exacerbate the fact America already has higher corporate taxes, and higher investment taxes on shareholders than most countries. (In addition to income taxes, corporations also pay a disproportionately large share of America’s property taxes. Mitt Romney would pay less in taxes if he lived in Canada or many European countries, which would tax his investment income less than America does.)

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