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Obama vs Romney on the Issues / FISCAL POLICY

How Big a Government?

President Obama and Mitt Romney have fundamentally different visions for spending and taxation.

photo of Nancy Cook
August 23, 2012

Few issues illuminate the presidential candidates’ wildly divergent views on the appropriate size and role of the federal government more than taxes and spending.

For President Obama, fiscal policy is a means for preserving the country’s safety net; promoting education, environmental protection, and other social goals; raising taxes on the wealthiest Americans to help to pay down the budget deficit and address income inequality; and boosting the domestic economy through manufacturing tax breaks and infrastructure programs, with the hope that both will create jobs.

“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said at Northern Virginia Community College after the release of his latest budget. “Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep investing in everything else—education, clean energy, a strong military, care for our veterans? We can’t do both. We can’t afford it.”

 

The president’s view of government is considerably less radical than Mitt Romney’s. Obama would keep the government largely intact and recognizable to those it now serves. A hallmark of his budget is the preservation of entitlement programs for children, seniors, and the poor.

Romney’s fiscal proposals lay out a much different future, with a smaller, streamlined federal government that turns a handful of programs over to the states and that ultimately provides a social safety net for fewer people. Before being selected as Romney’s running mate, House Budget Committee Chairman Paul Ryan, R-Wis., said that his fiscal 2013 budget blueprint, which Romney backs, prevents the safety net from becoming a “hammock” that “lulls able-bodied people into lives of complacency and dependency.”

If elected, Romney has agreed to sign Ryan’s budget brainchild. It calls for deep spending cuts that would eliminate some government agencies, turn Medicaid and food stamps into block-grant programs, and overhaul Medicare by giving its patients a subsidy to either buy private health insurance or stay with the traditional fee-for-service program. On top of this, the Romney-backed Ryan plan would slash tax rates across the board for individuals—paying for the lower rates by eliminating unspecified tax breaks. To bring the marginal income rates as low as Romney advocates, the nonpartisan Tax Policy Center estimates that he would need to get rid of a host of popular tax breaks that benefit families and workers, such as the mortgage-interest deduction; deductions for student-loan interest and charitable donations as well as state and local taxes; and breaks for employers that offer health insurance.

Eliminating these tax breaks would effectively amount to a tax increase on families that earn less than $30,000, according to the Tax Policy Center—the ones that benefit the most from these tax expenditures. Under Romney’s plan, taxpayers with income over $1 million would see their after-tax income increase by 8.3 percent, or an average of $175,000, a recent Tax Policy Center analysis finds.

“I do not, for one moment, share my opponent’s belief that our spending problems can be solved with more taxes. You do not owe Washington a bigger share of your paycheck,” Romney told supporters in Des Moines, Iowa. “Instead of putting more limits on your earnings and your options, we need to place clear and firm limits on government spending.”

Romney’s limits on federal spending and lower taxes versus Obama’s Keynesian-style spending and higher taxes on the wealthy offer contrasting prescriptions for jump-starting the economy, spurring growth, and managing the deficit. Each candidate is betting that his vision will work.

TAXES

Taxation will take center stage in the weeks immediately following the election, when trillions of dollars in tax provisions will expire, from the Bush-era cuts on income to breaks for businesses. The across-the-board spending cuts known as sequestration, mandated by last year’s Budget Control Act, will also be on the agenda.

The winner of the presidential contest will influence these decisions. If Obama is reelected, he will try to sway the contentious congressional debates over these issues in the lame-duck session. If Romney wins, Republicans in Congress may try to delay the major decisions until after his inauguration and the start of a new session in January.

Just as surely as Obama would try to use the lame duck to end the Bush tax cuts for high-income households, Romney and the Republicans would attempt to use the session to lay the groundwork for a major tax overhaul. Their plan would make the Bush cuts permanent and might also include Romney’s proposal to reduce marginal tax rates by 20 percent—a move that would reduce the federal government’s revenues by $456 billion in 2015, according to the Tax Policy Center. That’s billions of dollars on top of the assumption that the Bush-era tax cuts get extended.

In contrast, Obama wants to tweak the tax code by raising additional revenue from household income above $250,000 a year. People in the top bracket would see their rates rise to 39.6 percent, with another 3.8 percent tax on certain types of investment income, thanks to the taxes introduced in the Affordable Care Act.

Both candidates released corporate-tax proposals in February, within hours of one another, in a race to win the title of tax reformer. Romney’s plan calls for a territorial tax system, which would tax corporations only on income earned in the United States, and a reduction in the corporate rate from 35 percent to 25 percent. (In a November report, Congress’s Joint Committee on Taxation concluded that even if every corporate tax break were eliminated, it would be difficult to lower the rate below 28 percent without adding to the deficit.)

Obama’s plan, equally vague on specifics, would reduce the corporate rate to 28 percent; institute a minimum tax on multinationals’ overseas earnings; and give American manufacturers a special tax rate of 25 percent. Critics have argued that this would further complicate the code with yet another special-interest giveaway.

SPENDING AND THE DEFICIT

On government spending, the candidates again represent polar opposites. Romney pledges to significantly reduce federal outlays, even as he calls for huge tax cuts. Obama prefers to spend money now on federal projects that he says will boost the economy and spur job creation.

Romney has said he would put his spending plan into effect on his first day in office, when he has promised to cut nondefense discretionary spending by 5 percent. (Defense, in Ryan’s budget, is one of the few line items spared the red marker.) Romney says he would cap federal spending at 20 percent of the country’s gross domestic product by 2016.

In his budget, Obama proposed spending billions on infrastructure and transportation projects, initiatives he has introduced before with little success. Unlike Romney, the president would not cap federal spending as a share of GDP. His budget experts say that such a cap could hinder the government during tough times and preclude efforts to stimulate the economy during downturns.

Not surprisingly, the two men take similarly divergent approaches to the federal deficit. Obama’s budget proposes $4 trillion in deficit reduction over 10 years, with $1.5 trillion of that coming from tax increases and other savings from cuts in spending for farm subsidies, defense, and other programs.

Romney’s plans, by contrast, would make immediate, drastic moves toward austerity. His deficit plan would slash federal spending to 20 percent of GDP by 2016, and as low as 18 percent of GDP in later years—well below historic averages. In addition, his plan bets that lower tax rates will spur economic growth, boost the economy, and return the country to an era of budget surpluses and prosperity.

Of course, that’s a goal that the candidates share: leading the U.S. toward prerecession-level economic growth, controlled government spending, balanced budgets, and financial security. Through their fiscal policies, though, Romney and Obama offer up very different strategies for traversing that path. 

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