economist, co-director of the Center for Economic and Policy Research and author of Getting Back to Full Employment: A Better Bargain for Working People.
President Obama has unveiled a $4 trillion budget proposal for next year Congress that calls for raising taxes on the wealthy and corporations in order to help fund education and fix crumbling infrastructure. The plan includes tax cuts for some poor and middle-class families. It also seeks to recoup losses from corporations that stash an estimated $2 trillion overseas by taxing such earnings at 14 percent, still less than half of the 35 percent rate for profits made in the United States. Obama’s proposed budget also takes aim at the high cost of prescription drugs, proposes a new agency to regulate food safety, and seeks $1 billion to curb immigration from Central America. It also calls for a 4.5 percent increase in military spending, including a $534 billion base budget for the Pentagon, plus $51 billion to fund U.S. involvement in Syria, Iraq and Afghanistan. Speaking at the Department of Homeland Security, Obama said across-the-board cuts known as sequestration would hurt the military. We speak to economist Dean Baker, co-director of the Center for Economic and Policy Research and author of "Getting Back to Full Employment: A Better Bargain for Working People."
JUAN GONZÁLEZ: President Obama has unveiled a $4 trillion budget proposal for next year that calls for raising taxes on the wealthy and corporations in order to help fund education and fix crumbling infrastructure. The plan includes tax cuts for some poor and middle-class families. It also seeks to recoup losses from corporations that stash an estimated $2 trillion overseas by taxing such earnings at 14 percent, still less than half of the 35 percent rate for profits made in the United States. Obama announced his plan Tuesday.
PRESIDENT BARACK OBAMA: The budget I’ve sent to Congress today is fully paid for, through a combination of smart spending cuts and tax reforms. Let me give you an example. Right now, our tax code is full of loopholes for special interests, like the trust fund loophole that allows the wealthiest Americans to avoid paying taxes on their unearned income. I think we should fix that and use the savings to cut taxes for middle-class families. That would be good for our economy.
AMY GOODMAN: President Obama’s proposed budget also takes aim at the high cost of prescription drugs, proposes a new agency to regulate food safety, and seeks a billion dollars to curb immigration from Central America. It also calls for a 4.5 [percent] increase in military spending, including a $534 billion base budget for the Pentagon, plus $51 billion to fund U.S. involvement in Syria, Iraq and Afghanistan. Speaking at the Department of Homeland Security, Obama said across-the-board cuts known as sequestration would hurt the military.
PRESIDENT BARACK OBAMA: Just last week, top military officials told Congress that if Congress does nothing to stop sequestration, there could be serious consequences for our national security—at a time when our military is stretched on a whole range of issues. And that’s why I want to work with Congress to replace mindless austerity with smart investments that strengthen America. And we can do so in a way that is fiscally responsible.
AMY GOODMAN: Well, for more, we’re joined from Washington, D.C., by the economist Dean Baker, co-director of the Center for Economic and Policy Research and author of Getting Back to Full Employment: A Better Bargain for Working People.
First, your overall assessment of the budget that President Obama has presented, Dean?
DEAN BAKER: Well, on the whole, I’d say it’s probably the best budget he’s had since he’s been in office. I’m ignoring the—you know, the first one with the stimulus, which had a lot of good things in there, but, you know, since then. He has some good spending in there, in the sense he’s trying to increase spending on infrastructure, education, other areas that are both—we could think of as investment for the future, but also will help people, help a lot of low- and middle-income people. He also has some pretty good tax increases for the wealthy. He’s raising the tax rate on capital gains and dividends to 28 percent from—currently it’s about 22 percent, I believe, its latest number. It had been as low as 15 percent—that’s why I’m hesitating a second. And, you know, that’s a big tax increase. You know, these are—middle-income people don’t have a lot of capital gains, you know, or dividend income. So that’s a big deal. And he’s increasing the corporate tax. He’s proposing that you would have a tax, one-time tax, 14 percent on the foreign earnings of U.S. corporations that are already stashed overseas, and then 19 percent thereafter. That’s not ideal, in my book. There’s other ways you could structure that. But that’s a lot more than people have been talking about. So, that’s kind of the positive.
The negative is that we’re still, to a large extent, on an austerity path. He said he’s against mindless austerity. That’s good. So, this is maybe more thoughtful austerity. I’m saying that a little cryptically. But the point is, one of the reasons we’ve had such a slow recovery is that the government hasn’t been prepared to spend more, hasn’t been willing to increase the stimulus it gives to the economy, following a very severe recession. Every other recession, we’ve done that. In this case, instead of spending more, we’re spending less. We’re cutting back government employment. That’s hampered growth. And we’re still well below full employment, well below the economy’s potential. The Congressional Budget Office puts us at about 4 percentage points below the economy’s potential. That means, in effect, we’re throwing $720 billion a year in goods and services that we could be producing into the garbage. So, that doesn’t really change. And in terms of the spending in the investment portion of the budget, domestic discretionary spending, that’s not going down as fast as it would absent the increases President Obama has proposed, but we’re still looking at spending less in that category of the budget relative to the size of the economy than we did at any point in the '90s, the ’80s, the ’70s—I don't know how far back you’d have to go to find us spending less. So, there’s more investment, given his proposed spending, but it’s still not a lot, because the baseline was very, very low. So, on the whole, very mixed story.
JUAN GONZÁLEZ: Well, Dean, I wanted to ask you, first, about the military part of the budget. We’re talking about here $51 billion for ongoing activities in Iraq, Syria, Afghanistan, even though that supposedly the United States is withdrawing troops and ending those wars, and we’re still talking about spending $1 billion a week, essentially, next year?
DEAN BAKER: Yeah, well, you know, I don’t know when we’re going to see an end to those wars. I mean, you know, had my choice, it would have been a long time ago; we wouldn’t have been there, to begin with, but, you know, no one asked me. We are spending less. You could be happy about that. I mean, we had been spending, at the peak, about $180 billion, $190 billion a year, so we’re clearly spending a lot less. But, you know, $50 billion is not an inconsiderable chunk of change. So, you know, I mean, to my view, the bigger issue is the war than the spending. We could afford $50 billion. But the point is, you know, is this a good use of resources? Are we doing something positive for the world, for the country? That, to my mind, is much more important.
AMY GOODMAN: And how does sequestration fit into this? I wanted to turn to President Obama speaking about his budget proposal, addressing the issue of sequestration and claiming Republican lawmakers are playing politics with funding the Department of Homeland Security.
PRESIDENT BARACK OBAMA: I’m not going to accept a budget that locks in sequestration going forward. It would be bad for our security and bad for our growth. I will not accept a budget that severs the vital link between our national security and our economic security. I know there’s some on Capitol Hill who would say, 'Well, we'd be willing to increase defense spending, but we’re not going to increase investments in infrastructure, for example, or basic research.’ Well, those two things go hand in hand. If we don’t have a vital infrastructure, if we don’t have broadband lines across the country, if we don’t have a smart grid, all that makes us more vulnerable. America can’t afford being shortsighted, and I’m not going to allow it.
AMY GOODMAN: That’s President Obama on sequestration. Dean Baker, how has sequestration affected the economy in this country?
DEAN BAKER: Well, sequestration was basically a phasing down of spending, both on the military side and domestic discretionary, so that was a damper on economic growth. Again, we’re in the situation—to my mind, a very perverse one—where you have people running around Washington—certainly the Republicans, but unfortunately many Democrats, as well—saying, "Oh, we want to get the budget deficit down," and they’re patting themselves on the back, you know, "We reduced the budget deficit so much." And I’m going, "Well, we need demand in the economy, so what you’re patting yourself on the back for is pulling money out of the economy, reducing growth, reducing employment. I’m not happy about that. That’s not a good story. You threw people out of work." But in Washington, in the debates here, you know, getting the deficit down is a goal in itself, so it doesn’t matter how many people you throw out of work.
So, sequestration is a big part of that story. You know, it has both military budget and domestic discretionary on this downward path over the next decade, and that’s certainly slowed demand, slowed economic growth, and meant fewer jobs. So, President Obama is proposing to move away from that, and he’s throwing out—you know, he’s saying, "OK, I’m going to spend more on the military side. I also want to spend more on the domestic discretionary side." Whether that’s political, I mean, you know, I can’t speak to his motives, but presumably that makes it easier to—for Republicans to accept that he’s giving ground on the military side and not just asking for spending on the domestic side. Whether—you know, what he’ll end up coming out of Congress, who knows? But, you know, I’d have to say, realistically, it’s hard to imagine he could have gotten more domestic discretionary without making at least some concessions on the military side.
JUAN GONZÁLEZ: Dean, I’d like to get back to this issue of the tax holiday for overseas corporations. There’s $2 trillion that Microsoft and General Electric and all these other companies have been parking overseas for years because they don’t want to have to pay the U.S. a 35 percent corporate tax. But now President Obama is saying, "OK, we’ll let you bring that back for 14 percent." And you’re right that’s higher than the last tax holiday, when it was 5 percent, but you know, and I think a lot of people in Washington know, that that’s his opening number and that the Republicans are probably going to whittle that down even further. And that’s probably the only aspect of his proposal, other than reducing the corporate tax, that the Republicans are going to actually pay much attention to. And so, my concern is, some people have said this is—his proposal, especially the 19 percent ongoing on those foreign profits, will actually set a minimum corporate tax, and more corporations in the U.S. will shift as much as they can outside of the country and then claim this 19 percent tax, and that will become the floor for corporations.
DEAN BAKER: Well, I’m actually not too upset about that proposal. Again, it’s—both parts of it. It’s not my ideal. You know, there’s this idea of a unitary tax. A number of states—I believe California has it, but a number of states in the country have this, where they tax companies based on their worldwide earnings, and then they just say, you know, "If 10 percent of your sales are in the state of California, we’re going to say 10 percent of your profits are. We don’t care what you say. We’re going to treat it that way, and that’s what we’ll tax." You could do that. I think that would be the best route. But absent that, I don’t think this is too bad.
Now, you’re absolutely right. Fourteen percent is his starting offer. If you go back to '05, President Bush had amnesty where it was just 5 percent, so we're much better off at 14. Where does that end up? You know, presumably, Republicans aren’t going to say, "14 percent, fine." If it ends up close to 5, that’s a real bad deal. If President Obama says, "Well, maybe I’ll go to 13," you know, that—12—you know, that’s not too bad, because realistically we’re not getting it now. So, I’d rather see us get 12 percent than sit around and hope for the messiah that one day will have it taxed as, you know, ordinary income or ordinary profits. That’s not going to happen.
In terms of the 19 percent rate going forward, it’s actually a little higher than that, because they only give an 85 percent exemption on foreign taxes paid. So it ends up being—we could do the arithmetic—probably around 21, 22 percent. Companies—almost no companies actually pay 35 percent. That’s the marginal tax rate. If you look at the average tax rate, it varies year to year, but it is around 19, 20 percent. So, I’m not really worried about companies en masse, you know, shipping—trying to arrange to shuffle their profits overseas. They have been doing that, because, you know, as it stands now, you could basically defer them to eternity or hope 'til you get someone like President Bush give you a 5 percent tax holiday. So, this makes that less desirable than it is today. So if we actually got the 19 percent rate, I don't think the Republicans are going to jump and grab that, but if they did embrace that, I think you’d see less of the sort of tax shifting that we’ve been seeing over the last 15 or 20 years. So I consider that overwhelmingly a positive story.
AMY GOODMAN: Dean, during his State of the Union address, President Obama called for taxing the rich.
PRESIDENT BARACK OBAMA: And let’s close the loopholes that lead to inequality by allowing the top 1 percent to avoid paying taxes on their accumulated wealth. We can use that money to help more families pay for child care and send their kids to college. We need a tax code that truly helps working Americans trying to get a leg up in the new economy, and we can achieve that together.
AMY GOODMAN: So talk about this thrust of President Obama and how it expresses itself in the economy. And how different is this than presidents past?
DEAN BAKER: Well, there’s a few things in here. I mentioned before that he’s proposing to raise the tax rate on capital gains and dividend income from 22 percent to 28 percent. That’s a big increase for wealthy people, because that’s where—you know, you think of the Bill Gateses, the Warren Buffetts—that’s where most their income is coming from. They own a lot of stock, and they’re getting dividend payouts. They sell it for a profit. And as it stands, they paying less, a lower tax rate than—you know, middle-income people are paying 25, 28 percent. So, this is a very big step in the right direction. You know, The New York Times had a piece: this is spreading the wealth around; they had this being socialism or whatever. I like to point out, 28 percent is the rate that Ronald Reagan signed off on back in 1986 in the tax reform. So, that’s hardly an exorbitant rate. We’ve been there before. But I’m glad to see him go in that direction.
He has a few other things in there. As it stands now, if you have someone—they die, pass on the estate to their heirs, there’s something called the step-up basis for capital gains. So let’s say this person, this wealthy person, had made $100 million on owning Microsoft stock, or whatever it might be. They pass it on to their children. Well, their children never pay tax on that capital gain. It’s treated, OK, $100 million. If they sell it the next day, they don’t pay any tax on it. If they wait a few years and it’s worth $120 million, they just pay tax on that $20 million. One of the things he proposed is that that money would be taxed at the point the estate would be passed on. So if you had $100 million in capital gains, that would be taxed at the capital gains rate. So that would be a big hit to a lot of wealthy people—and, to my mind, totally justified.
There are a few other odds and ends. People talked about when president—Governor Romney was running in 2012, he had over $100 million in an IRA, a tax-sheltered account. He proposed limiting that—I forget, $3 million, $4 million, something that, you know, any middle-income person is going to be under. So, you know, this is supposed to be a middle-income savings vehicle, not something for the richest in the country to shield their income from wealth. There are a few other things in there of that nature. Individually, they don’t amount to much; even collectively, they aren’t that huge. But it’s the sort of thing that, you know, frankly, it’s just kind of obscene. I mean, the rest of us are paying our taxes; Mitt Romney’s got $100 million in a tax-sheltered IRA. Very hard to justify that. So, to my mind, these aren’t necessarily huge things, but they’re definitely in the right direction, and I was very glad to see President Obama propose them.
JUAN GONZÁLEZ: And what about the issues of Social Security, Medicare and Medicaid? The Republicans are always talking about the need for the government to rein in future—future budget costs for what they call the, quote, "entitlement programs." How does the budget deal with that?
DEAN BAKER: Well, one very positive thing: Social Security is not mentioned here. In years past, President Obama had proposed changing the cost-of-living adjustment formula so that people would get less year by year. It would be roughly—his proposal would have reduced the annual cost-of-living adjustment by about three-tenths of a percentage point a year. That might sound trivial, but over 10 years it’ll be 3 percent; 20 years, 6 percent. So, someone’s, you know, in their nineties, been collecting Social Security for 30 years, they’re looking at about 9 percent less benefits. And that’s a big deal for a lot of older people whose Social Security is the bulk, if not their entire income. So that would have been a big deal. That’s not there, so that’s a very good story.
He had some proposals on Medicare, a mixed bag. I mean, some of these will—he’s proposing some reductions in payments to drug companies—good thing; reductions in payments to insurance companies through the Medicare Advantage program—again, a good thing, this is a subsidy for insurance companies that has no rationale. On the other hand, he’s proposing some increased cost sharing, and he talks about for higher-income beneficiaries. And we’re talking about people $50,000, $60,000 a year—these are not ordinarily people we talk of as wealthy. So, that, to my view, is not a good story.
But one thing that I think people should realize—and this is a change, whether President Obama deserves credit for it or whoever; you know, one could quibble about that—but we’ve seen much, much lower growth in healthcare cost over the last five or six years. And you’re now seeing that included in the projections. And, you know, for what that’s worth, that makes the story look, 10, 20 years out, much, much more manageable. So, before, we used to have these people running around: "Oh, my god! You know, the debt’s, deficit’s exploding! We’re going to have these huge, huge burdens." Well, as it stands now, you know, if you look out a decade, you look out two decades, the story—you know, they’re projecting deficits, but they’re very much manageable deficits. So, the story of, you know, the baby boomers, people like me, retiring and bankrupting the government, it doesn’t make any sense—not that it ever did make any sense, but, you know, there’s just no story there. And I think we could at least be happy about that, that whatever problems we face, in terms of being able to pay for these programs, they’re very manageable.
AMY GOODMAN: Dean Baker, I wanted to ask you about infrastructure, the economy and also climate change. I mean, you have this horrendous accident that happened last night in New York, Westchester, seven people dead. A train hit a car. But that goes to a bigger issue. I mean, they have had increasing accidents on the Metro North line, which was once considered one of the safest in the country. In 2013, the American Society of Civil Engineers gave the national infrastructure an overall grade of D+. And then climate change of course affecting infrastructure across the country. Your comments?
DEAN BAKER: Well, you know, President Obama has proposed some additional spending, but, I have to say, these are really kind of baby steps. I mean, maybe he couldn’t get more through Congress, but, you know, we know he’s not going to get his proposal through Congress in any case, so you sort of think, "Well, why not think big? Why not put more on the table?" So, we’re on a path of declining infrastructure spending. His proposals make the decline less rapid, but it’s really going the wrong way. I mean, we should be looking to spend more both for creating jobs today, but also because it’s needed. We need to upgrade our infrastructure. Instead, we’re letting it deteriorate.
And in terms of climate change, again, we have—I’m not going to say "infinite" need, but we have tremendous need for retrofitting our buildings, for developing a more energy-efficient infrastructure, mass transit, on down the list, because we should be treating climate change with urgency. Again, the Republican Congress doesn’t want that, but I think it would have been more helpful if President Obama had put some really big things on the table. There is some money there, so I’m not saying he’s doing nothing, but, you know, like an order of magnitude too small to address the problem.