Rand Paul’s Budget Proposals Just Don’t Add Up to Success

Less than a week out of the starting gate, Rand Paul is already picking up the wrong kind of public attention, due largely to his combative attitude toward the media, which has been picking on him (or so he appears to think) because of his refusal to answer direct questions about his presidential platform with direct answers. Now he appears to be “cooking the books” by removing previously published material about his tax plan from his campaign website because of the controversy the items in question have stirred up, according to The Washington Post. Here’s what the Rand Paul for President website originally said, and what they don’t want you to see now:

Now, if you visit the Rand Paul for President website TODAY, you will not find this quote…because it was removed three days ago. The Washington Post reported this story yesterday, following up on a National Journal article pointing out that the website had been revised to remove these quotes. The reasons for the deletions are obvious to anyone with a decent ground in economics. The proposals don’t work. These proposals are not just unworkable. They constitute a direct attack upon the basic fabric of the American economy that might very well constitute a “clear and present danger” to this country if they were ever to be implemented.

It’s not unusual for presidential hopefuls to adjust their policy proposals in response to public criticism. Indeed, not to change positions that are demonstrably wrong might just be a disqualifying behavior from a presidential candidate. On the other hand, flip-flopping has been known to undermine otherwise viable candidacies within their own parties, not to mention with the media and the general public, as Mitt Romney found out during the 2012 campaign. 

No matter how you slice and dice it, picking a president is rather like buying a used car. You can’t rely on anything the used car salesman tells you about the car. The only way to tell whether the car is a good deal is to drive it yourself….to a mechanic you trust for a thorough evaluation. Unfortunately, when it comes to picking a president, you can’t test drive the candidates before you pick one. This leaves only two alternatives: examine what the candidates say about their policies and evaluate the candidate’s public comportment. So far, at least, Rand Paul’s suppositions often contradict the facts, and his comportment leaves much to be desired in a potential president of the United States. (Here’s a hint: he behaves like someone who believes that he ought to be president of the United States, a common failing among Republican politicians, who then cannot understand why anyone would have the temerity to contradict them.)

Rand Paul Promises to Balance the Budget

The Rand Paul campaign’s brand new website promises to balance the budget…and he even says how: by only spending what comes in. The last Republican president to preside over a balanced budget was Dwight David Eisenhower, who accomplished that feat in 1956 and 1957. Every Republican candidate since Eisenhower has promised to balance the budget, but the only president who succeeded in doing so was Democrat Bill Clinton. Rand Paul’s plan – the “live within your means” school of financial management – is very attractive to conservative voters who have been schooled to believe that government wastes taxpayer’s money on frivolous schemes. Alas, sometime, governments do exactly that, but it might be a good idea to examine the tub to determine whether there’s a baby in the bath water. In other words, what would we lose if we start cutting programs to stay within our means as a nation instead of increasing our tax revenues as Eisenhower and Clinton did?

According to the U.S. Department of the Treasury, the federal government took in $3.021 trillion in 2014 and spent $3.504 trillion adding $483 billion to the national debt. According to the popular usfederalbudget.us website, the government spent $3.506 trillion, a mere $2.1 billion discrepancy which, as the saying goes, is close enough for government work.

When Paul says that he is going to balance the budget by spending only the revenue the government actually takes in from taxes, he is saying that he wants to cut $483 billion (almost half a trillion dollars) from the federal budget. Telling us that he’s going to balance the budget by cutting spending is fine and dandy, but he isn’t telling us where he is going to cut. That’s like asking us to buy a pig in a poke. (Mitt Romney tried the same trick in 2012, but it didn’t work for him either.)

Rand Paul Promises America a $700 Billion (ANNUAL) Tax Cut

Rand Paul has also pledged to implement a 17 percent “Fair and Flat Tax plan” that would shave an additional $700 billion from federal revenues per year. The combination of the pledge against deficit spending that would have cost $483 billion in 2014 and a $700 billion tax cut would have required a Rand Paul’s administration to shave at least $1.183 trillion from the 2014 budget of $3.506 trillion, leaving Paul with just $2.323 trillion to work with. That would be equivalent to a 33.74 percent cut in federal funding across the board. (We are using 2014 as the benchmark for this analysis because the dust has settled for that year and the figures are now more reliable than interim figures for 2015 or projections for 2016.)

Every Republican president promises to cut taxes, and every Republican since Ronald Reagan has embraced the so-called “trickle down” theory of economics, a theory that George H.W. Bush once labelled “voodoo economics” when he ran against Reagan for the Republican presidential nomination in 1980. (Reagan magnanimously let bygones be bygones when he selected Bush as his running mate anyway.) Whether they call it the trickle down theory, supply side economics, or simply voodoo economics, recent Republican candidates either explicitly or implicitly embrace the Ayn Rand school of economic theory, which is based on the notion that, when you cut taxes, economic activity increases. A study of economic history, however, indicates the exact opposite. The periods of greatest prosperity in the United States have always coincided with periods of higher taxation. Eisenhower and Clinton both presided over successful economies during periods of high taxation. Reagan and Bush II presided over weak economies during periods of low taxation. Nevertheless, promising to cut taxes never hurts, especially if you never have to explain what you would cut until after the election, when it is too late to change horses in midstream.

Let’s go back to that Fair and Flat Tax plan for a minute. What does that actually mean? It means several different things, none of them good:

1. First and foremost, a flat rate tax plan at 17 percent would bankrupt the country. You don’t even have to do the math to realize that. Right now, the tax rates range from 15 percent up to 35 percent for direct taxation of income, excluding all other taxes. A flat rate of 17 percent, first of all, increases the rate for the least affluent tax payers, while dramatically cutting the tax rate for workers earning $335,000 a year or more. As a matter of fact, it cuts the tax rate for high earners in HALF, shifting the burden of taxation from the rich to the poor. The theory is that rich people, having to pay less taxes, would spend more but rich people are notoriously savers rather than spenders. That’s how they became rich in the first place. It’s not how much you make, as Republicans like to point out, but how much you keep that matters.
2. Secondly, and even worse from the point of view of the average American family, a flat-tax does away with itemized deductions, which means that tax payers would no longer be able deduct mortgage interest from their adjusted gross income. Without that deduction, millions of Americans would no longer be able to afford the same homes with the same mortgages that they were able to afford the previous year…and people attempting to buy homes would no longer be able to afford them without the assistance of the mortgage interest deduction. This would have a devastating and unprecedented impact on real estate values.
3. Finally, Paul promises to eliminate every form of “double” taxation, including capital gains, dividends, estate, gift and interest tax. Whether or not these are really instances of “double” taxation is open to interpretation but what is evident is that eliminating those taxes would cut deeply into the tax revenues again, perhaps by half as much as the total gross proceeds.

Paul’s apologists have been trying to assert that the Fair and Flat Tax Plan would allow some exemptions but the whole point behind a flat tax is that there are no exemptions under flat tax schemes. That’s the theory that has been propounded by flat tax advocates for the past 50 years, which directly contradicts CNN’s assertion that Paul’s flat tax program would allow the standard exemptions already allowed by the current tax system to reduce the taxable income. That’s not what Paul’s website said, before that page was taken down, and that’s not what any flat tax proponent believes. More precisely, that is not what Paul’s website did NOT say. In the absence of any suggestions that tax payers would be able to itemize their deductions, we have to assume that there would be no itemization and therefore no exemptions.

The net result of this platform plank would be an economic catastrophe of unprecedented proportions that would make the Recession of 2008 look like a sniffle instead of a near fatal illness. Property values would fall to perhaps a third of their present values, new construction would stop dead, and the snowball effect of collapsing property values would generate millions of foreclosures and bankruptcies, turning America into a nation of renters instead of a nation of homeowners….and yet millions of Americans will embrace this fanciful notion without ever realizing where it could lead.

The Fair and Flat Tax Plan is neither fair, nor do-able. The question, however, is whether Rand Paul removed that page from his website because he realized that it wasn’t fair or doable, or because he simply didn’t want to tell us quite so bluntly what he plans to do to us.

What would Rand Paul’s cutbacks look like?

What would a $1.183 TRILLION dollar reduction in federal spending look like?  We don’t actually know, because, so far, Rand Paul has only disclosed what he is going to do – reduce the budget and cut taxes – but he hasn’t explained how he plans to do these things. Nevertheless, there are hints on his campaign website and his previous pronouncement that enable us to make some educated guesses.

There are basically three ways to cut a budget: across the board cuts in which each department is cut by the same percentage, line item cuts in which specific programs are killed off and, most Draconian of all, the decimation of whole government agencies or departments. Another way of putting it is: apolitical cuts, amoral cuts and immoral ones, otherwise known as sharing the pain, inflicting pain, or scored earth budgeting.

In this chart, Plan A demonstrates the effects of an across the board cutback, shaving 33.74 percent from each budget category. This is the “share the pain” budget. Everyone’s ox gets gored, but everyone survives, battered and bloodied though they may be. The effects are obviously Draconian…and undo-able for several reasons. We can’t stop making interests payments on our debts because that would trigger an instantaneous collapse of the government, the economy, and world civilization, something budget radicals like Paul just don’t understand, and there are other line item categories that simply cannot be cut for a variety of pragmatic reasons, some real and some imagined.

Plan B makes selected cuts on the basis of the golden rule of expediency. As much as he would like to walk away from the national debt, Paul is enough of a politician to know that he could never get away with that, so we have put 1oo% of the debt service back into the budget. By the same token, cutting 33 percent from the Defense budget will not be politically acceptable….but Paul might get away with a 10 percent cut. In order to protect the interest payments and the military, Paul would have to find offsetting cuts of $267.14 billion on TOP of the 33.74 percent cuts that have already been taken in this scenario. That works out to another 11 percent across the other line items in the budget (and just over 9 percent of the defense budget). In the final analysis, Plan B cuts 44.74 percent from Pensions, Health Care, Education, Welfare, Protection, and General Government operating costs.

Plan C is the wishful thinking budget, what Republicans would like to do to express their philosophical orientation. It is based on Rand Paul’s professed political agenda culled from public statements and his own website.

Plan C would decimate education on the grounds that the conservative party line is that the federal government should not be interfering with education, which is a state and local issue. The only reason that a Rand Paul administration would not completely eliminate the Department of Education is that even the most thick-headed rank and file Republican would become concerned when their kids came home from school with a $500 bill for textbooks, for example. Without federal subsidies for education, the states and municipalities would be forced to charge parents for materials currently provided free of charge, putting an end to free public education in the United States.

By the same token, conservatives don’t like welfare. They believe that if the federal government stopped funding welfare programs, the states, municipalities and community based organizations would step in to pick up the slack but no one has yet explained where state and local governments would get the wherewithall to pay for those expenses.

Health care is another Republican target. They want the federal government to get out of the health insurance business, which means shutting down Medicare and Medicaid, but even the hardest hearted Republican knows that it isn’t possible to completely eliminate health care expenditures because every hospital in the country would go belly up without Medicare and Medicaid revenues.

Take a closer look at Plan A. This is what $1.183 trillion in budget cuts looks like. The best way of describing this plan would be to call it an unmitigated disaster. Imagine getting two-thirds of the medical care you used to get. Would that mean getting to see a doctor two out three times that you needed to see a doctor, or only getting two-thirds as many pills as you need? Imagine going into combat with only two-thirds of the ammunition you need to carry out your mission, or two-thirds of the fuel you need to get back to your base of operations, or would you simply not go out on every third mission? None of this matters though, because, if we started paying only two-thirds as much interest on our bonds as we are supposed to be paying, our economy would collapse in a matter of weeks, if not days.

Now, take another look at Plan C, the one we think that a President Paul would opt for if he were to become president. This is a balanced budget, but it is a fair budget? We can make a case for preserving defense spending because, without defense spending, the economy would collapse just as surely as it would from another implosion of real estate values, but do we really need to spend as much as the next 24 countries on the list of military spenders, especially since 23 of them are allies of ours? On the other hand, do you really think the states, cities and towns are going to step in to provide welfare services to the poor and, if so, where do you think they will get the money to do those things? Finally, do you really think it is fair to cut the social security allotments to generations of citizens who paid their premiums in good faith throughout their working lives?

Media Confusion:  Business Reporters are Math Challenged.

The media are just as clueless about taxes and spending as the candidates are. Business Insider published an article critical of Rand Paul’s budget proposals this week in which it says:

What comes in: The government is projected to collect $3.5 trillion in revenue next year. Where it goes: Of that money, nearly $2.5 trillion will go for Social Security, Medicare and other automatically paid benefit programs, and $277 billion to pay interest on the debt. That’s according to projections from the nonpartisan Congressional Budget Office.

Social Security and Medicare receipts are revenues but they are not taxes, even though Business Insider implies that they are by conflating revenues and taxes. Proof: it cites $2.5 trillion going to benefits and $277 billion going into debt service, thus conflating items paid for with non-tax revenue with items paid for with tax revenue.

Business Insider also appears to be math challenged. First of all, there is no 2016 Federal budget. All we have so far is just a hodgepodge of dueling budget proposals, none of which have the slightest risk of being enacted into law. Secondly, the only dependable documents we have to work with are the actual 2014 expenditure report and the somewhat fanciful 2015 budget projections. Based on those numbers, the total cost of Social Security and Health Care expenditures comes to $1,835.7 trillion (actual) for FY 2014 and $1,891.6 (projected) for FY 2015.

Given that the budget projection for 2014 was $1,902.1  trillion, against actual expenses of $1,835 trillion, we can somewhat safely assume an error rate of 3.49 percent. This means that the actual projected budget for Social Security and Health Care would be around $1,825.6 trillion…that is a great of money, but it is also a great deal less than the “nearly $2.5 trillion” that Business Insider reported.  Even if we add in the $370 billion for Welfare costs, the revised sum would “only” come to $2,195.50 trillion, which is still nowhere near the “nearly” $2.5 trillion than Business Insider likes.

Revenues are a combination, among other sources of income, of the proceeds from taxation plus insurance premiums. The insurance premiums do not accrue to the federal government. They accrue to the Social Security and Medicare trust funds. The payments received by Social Security and Medicare recipients do not come from income tax revenues; they come from the Social Security and Medicare fund contributions paid into the system by the current generation of workers and their employers. While the difference between taxes and insurance premiums may seem immaterial, there is one important difference:  Insurance premiums entitle the payer to something; tax payments do not.

The Last Straw:  The Assassination of Social Security

On the now-missing page from Rand Paul’s website, he said that he wants to exempt low and middle class wage earners from having to pay their share of the Social Security tax. This is the kind of meat and potatoes issue that Senator Paul thinks will bring the Millennial, Gen Xers, and other younger workers into his camp because they have been indoctrinated to believe that Social Security won’t be around when it is their turn to collect. ( A one percent increase in the Social Security premium rate would guarantee the security of the fund into perpetuity, but don’t tell a Republican that.)

Strictly speaking, the Social Security payments taken out of each pay check you get isn’t a tax. It’s an insurance premium, but it feels like a tax, and conservative economists always add the 12.4 percent premium (divided equally between employers and their employees) into the tax burden of the American worker. This helps to buttress their contention that Americans are overtaxed. From that point of view, Rand Paul could make a case that exempting low and middle-income workers from paying their Social Security premiums would be a tax cut and claim that exemption as part of the $700 billion tax cut he wants to give the American people.

That’s very clever. It is also very deceitful because, by asserting that Social Security payments are a tax and then exempting workers from paying that tax, Rand Paul could make good on his pledge to give Americans a $700 billion tax cut without having to actually cut $700 billion out of the federal budget. Here’s how that works:

Eighty percent of the American work force falls into the low and middle-income categorizes, if you define the median middle-income earnings conservatively at $50,000 per year. In 2014, Social Security collected $884.276 billion. (You have seen higher figures up to $1 trillion and more, but those numbers include the Medicare payments, another insurance premium.) If Social Security costs are split 50/50 between employers and employees, then the employee’s share of the contributions for 2014 came to $442.138 billion. If 80 percent of American workers are in the middle-income category or lower, Rand Paul’s policy would cut Social Security revenues by approximately $353.710 billion. (Do the math: multiply $442.138 billion x .80= $353.710 billion) Social Security’s gross disbursements for 2014 was $859.230 billion. With revenues cut by $353.710 billion each year, Social Security would have to withdraw that same amount,$353.710 billion, from its trust funds to cover the disbursements, which would deplete the agency’s cash reserves of $2,789.476 trillion in just under eight years, effectively destroying the fund and forcing millions of senior citizens into abject poverty.

Certainly, from Rand Paul’s point of view, exempting some workers from having to pay their share of their Social Security contributions would constitute a tax cut for those workers. This strategy would also enable Paul to make good on his pledge to give Americans a $700 billion tax cut while only having to cut $346.290 billion from the federal budget. That would reduce the total cuts to the 2017 federal budget (the first budget Rand Paul would get to write) to “just” $829 billion for that year. Exempting defense spending and debt service from the cutbacks would result in across the board cutbacks of 33.74 percent to the federal budget. Some Rand Paul apologists have tried to suggest that Rand Paul was proposing a “reduction” in the Social Security “tax” but the term “exemption” doesn’t mean a rate reduction; it means that low and middle class workers would be given a pass that would eviscerate Social Security.

These programs only impact the federal budget when their annual costs exceed the revenues received from the payroll deductions. If Social Security doesn’t really affect the Federal budget one way or the other, why has the Republican party been trying to kill Social Security since the day it was enacted into law? The answer is that there is a huge insurance industry in the United States that would benefit greatly from the privatization of retirement planning. Privatization, which George W. Bush quickly backed away from when the previous generation of Republican leaders – including his father – told him that it a very bad idea, takes a significant percentage of the value invested in private retirement plans to pay corporate overhead and dividends to shareholders. The same rule holds true for the health insurance industry. In both cases, however, the introduction of the profit motive into the provision of these services would inevitably result in a significant decrease in the coverage received by the insured from those programs without a corresponding increase in monthly premiums, which would constitute one of the many “invisible” taxes the Paul Plan would inflict on the American people.

In the Final Analysis

When all is said and done, then, Senator Paul’s announced fiscal plan for the United States would require cuts totaling a minimum of $829.29  billion from the federal budget. This would include the $483 billion he has to cut to honor his pledge to only spend what the government takes in, plus the $700 billion tax cut, less the $353.71 billion he plans to “steal” from Social Security. So, instead of an across the board funding cut of 33.74 percent, Paul would end up with an across the board cut of 23.65 percent.

While it is patently obvious that the American people would not tolerate a 33.74% funding cut, it is remotely possible that they might be gulled into accepting a 23.65 percent reduction in the federal budget….if they got to evade their Social Security obligations in the process. In the final analysis, Rand Paul is betting that the American people are stupid enough to fall for a plan that would decimate Social Security, eviscerate health care, obliterate education, and shatter welfare programs for the neediest Americans.

It is, today, a moot point whether or not Social Security was a good idea. This is the road we started down eighty years ago, and we have painted ourselves into a corner from which there is no easy egress.  Present and future Social Security recipients have a “moral lien” on the government of the United States that require us, as a nation, to either pay up, making good on the promises made us to ourselves to provide a retirement income commensurate with the premiums that we have paid into the Funds, or reimburse us for the total value of the contributions we have made to the funds and we can’t do that because we don’t have the money to do so. Therefore, doing anything to undermine Social Security constitutes the undermining of the entire social fabric of the nation. It is a stupid nation that refuses to repay its citizens according to its own rules.  Changing the rules at this point constitutes a descent into absolute dictatorship, taxation without representation, and all the other things the Republicans say they are against.

That’s Ayn Rand, er, Rand Paul for you.