Obama Exaggerates Deficit Savings in Budget: Reality Check

U.S. President Barack Obama and Vice President Joe Biden
Democratic presidential candidate, U.S. President Barack Obama, right, and Democratic vice presidential candidate, U.S. Vice President Joe Biden wave after accepting the nomination during the final day of the Democratic National Convention at Time Warner Cable Arena in Charlotte, North Carolina on September 6, 2012. Photographer: Tom Pennington/Getty Images

President Barack Obama and Vice President Joe Biden made a number of factual assertions in their acceptance speeches last night at the Democratic National Convention in Charlotte, North Carolina. How did they square with reality?

Obama’s Deficit Plan

The Claim: Obama said that “independent experts” agree his budget plan “would cut our deficit by $4 trillion.”

The Background: The U.S. budget deficit has taken a central role in this year’s presidential campaign. The $4 trillion figure mentioned by Obama and others is politically significant because that’s how much was recommended by the chairmen of Obama’s 2010 deficit-reduction commission. For some budget experts, the panel’s proposal has become the standard of fiscal rectitude.

The Facts: Obama was incorrect. His budget does purport to cut the deficit by more than $4 trillion. Some of the savings are illusory, such as $700 billion that comes through an accounting gimmick related to war spending -- counting as budget cuts the money that won’t be used for wars that are ending.

‘Well Short’

The deficit-reduction figure also includes more than $1 trillion in cuts in so-called discretionary spending that were already agreed to as part of a deal last year to raise the government’s debt limit. The administration’s budget “falls well short” of $4 trillion in savings, according to February analysis by the nonpartisan Committee for a Responsible Federal Budget.

Ultimately, what matters with a budget is how it affects the debt, not how much it purports to cut. That’s because when politicians claim to save a certain amount of money, they’re comparing their proposed budget to what they say the government would otherwise spend over the next decade.

Politicians can inflate purported savings by exaggerating how much the government would spend in the absence of their budget. The more they assume, the bigger the savings appears.

It’s more important to look at where a budget leaves the federal debt over the long term. Republican vice presidential nominee Paul Ryan’s plan would leave the government with a $15.3 trillion debt in 2022, which would be about 62 percent of the nation’s economy. Obama’s plan would results in an $18.8 trillion debt in 2022, or about 76 percent of the gross domestic product.

Clinton’s Tax Rates

The Claim: Obama said he wants “the wealthiest households to pay higher taxes on incomes over $250,000 - the same rate we had when Bill Clinton was president.”

The Background: Obama wants to let the George W. Bush-era tax cuts for top earners expire as scheduled at the end of 2012. He links the tax rates in place under Clinton with the economic expansion and job growth that occurred during the 1990s.

The Facts: Obama is telling only part of the story about the taxes he wants top earners to pay. Yes, he is proposing that the top marginal rate on ordinary income return to 39.6 percent, which is what it was under Clinton. At the same time, he has proposed or already enacted provisions that would make these households pay more than they did under Clinton.

Obamacare Taxes

The 2010 health care law included a 0.9 percent tax on the wages of top earners and a 3.8 percent tax on their unearned income, such as capital gains and dividends. Those levies, which will take effect in 2013, would raise taxes by $318 billion over the next decade, according to the Congressional Budget Office.

Furthermore, Obama has proposed capping the tax breaks received by top earners at 28 percent. That would limit their ability to deduct charitable contributions, mortgage interest and state and local taxes. They also would pay taxes on their municipal bond income and employer-sponsored health insurance, which are both now not taxed. Those proposals, in Obama’s most recent budget, would raise $584.2 billion over the next 10 years, according to the Office of Management and Budget.

In one respect, top earners would get a partially offsetting break, because Obama wouldn’t change the tax rates for the first $200,000 of income for individuals and the first $250,000 of income for married couples.

Territorial Tax

The Claim: Biden said that Republican presidential candidate Mitt Romney has proposed “a new tax -- it’s called a territorial tax -- which the experts have looked at and they acknowledge it will create 800,000 new jobs -- all of them overseas. All of them.”

The Background: Romney has proposed changing the basic principles of the U.S. international tax system. Under current law, companies owe U.S. taxes on the profits they earn around the world. They receive tax credits for payments to foreign governments and don’t have to pay U.S. taxes until they bring the money home. U.S.-based companies with substantial overseas operations keep profits overseas to avoid taxation here. Romney wants the U.S. to adopt a territorial tax system under which companies would owe little or no taxes on their overseas income.

The Facts: Biden overstated the case. His 800,000 jobs number is based on a study conducted by one expert, Kimberly Clausing, an economics professor at Reed College in Portland, Oregon. Her July analysis examined the effects of a “pure” territorial system under which U.S. companies would face no domestic taxes on their foreign income.

Romney hasn’t provided details on what his territorial tax system would look like. The clearest Republican proposal on the issue has come from Representative Dave Camp of Michigan, the chairman of the House Ways and Means Committee. It would exempt 95 percent of foreign income and includes provisions opposed by companies that prevent them from shifting profits outside the U.S. That’s not the pure proposal that Clausing analyzed.

U.S. companies maintain that a territorial tax system would make them more competitive in foreign markets, creating more jobs in research and administration that are often located in the U.S.

Clausing’s study doesn’t say that no jobs would be created in the U.S. Instead, it says that a pure territorial tax plan would increase employment by U.S. companies in low-tax countries.

Campaign Finance

The Claim: Obama said, “If you reject the notion that our government is forever beholden to the highest bidder, you need to stand up in this election.” He decried “the people with the $10 million checks who are trying to buy this election.”

The Background: Although he was the first major-party presidential nominee to reject federal funding and post-Watergate limits on private contributions when he ran in 2008, Obama has portrayed himself as a reformer on campaign finance. He refused to take contributions from registered lobbyists, didn’t allow them to raise money for his campaign, and banned former aides from lobbying the White House. Obama criticized the U.S. Supreme Court’s Citizens United decision, which led to the creation of super-political action committees and an explosion of nonprofit groups running political ads without disclosing their donors. He has endorsed legislation requiring such groups to identify who’s funding the ads.

The Facts: Obama himself is benefiting from a super-PAC that’s running ads against Romney. The group, Priorities USA Action, has raised $25.5 million through July, compared with $137 million taken in by two groups supporting the Republican challenger.

Obama has done little that is within his power to change campaign finance rules. The Federal Election Commission, which oversees elections, could impose new disclosure requirements and pass tougher regulations concerning super-PACs, which are supposed to operate independently of candidates, though they are staffed by former campaign aides. The problem is the FEC is deadlocked along party lines, with the three Republicans opposing any new regulations.

Obama could appoint new commissioners; five of the six members are currently serving past their expired terms. In four years, the president has nominated only one commissioner, and withdrew that name after the Senate failed to act.

“Notwithstanding his promises to the contrary on the campaign trail, cleaning up Washington has not been a high priority for President Obama,” Paul Ryan, a lawyer for the Campaign Legal Center, which seeks stronger oversight of political giving, said in April.

— With assistance by Brian Faler, Richard Rubin, and Jonathan Salant

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