Obama vs. Romney: Should the U.S. Government continue to spend at current levels even if it means ra

President Obama believes in an activist government’s role in improving society. Without public intervention, private markets will not sufficiently address inequality or several other public needs, such as environmental preservation and public transportation. Financial returns from investments in such areas are often insufficient to incentivise private sector investment. However such schemes generate high levels of welfare benefits that are desirable from a societal perspective.

Obama’s economic policy draws on Keynesian economic theory, which is the belief that a mixed economy of public and private enterprise, bolstered by a strong welfare state, can jumpstart the economy. In order to create public enterprise, the government needs to spend, either by building a deficit or from tax revenue.[1] This is the policy he has pursued in his first term with a successful stimulus of $787 billion.[2]

Obama’s tax policy boils down to the empirical belief that taxing the rich will help the economy grow, because the revenue can be used on important government programs that can spur growth, and the philosophical argument that the American economy should be more equal and that the U.S. government can and should do more to directly address inequality. It should therefore not be a surprise that Obama wants the Bush era tax cuts for the richest reversed arguing "I just believe that anybody making over $250,000 should go back to the income tax rates we were paying under Bill Clinton."[3]

[1] Blinder, Alan S., “Keynesian Economics”, The Concise Encyclopedia of Economics, 2^nd Ed., 2008, Library of Economics and Liberty, http://www.econlib.org/library/Enc/KeynesianEconomics.html

[2] Grunwald, Michael, “Think Again: Obama’s New Deal”, Foreign Policy, Sept/Oct 2012, http://www.foreignpolicy.com/articles/2012/08/13/think_again_obamas_new_deal

[3] Bendery, Jennifer, “Obama Calls For One-Year Extension Of Bush-Era Tax Cuts For First $250,000 Of Income”, Huffington Post, 9^th July 2012, http://www.huffingtonpost.com/2012/07/09/obama-bush-tax-cuts-middle-class_n_1659284.html

Government spending of the level advocated by Obama will only lead to a handicapped economy riddled with inefficiencies.

The figures alone suggest that the Keynesian theory of increased spending stimulates growth and reduces unemployment is a myth. Despite trillions of dollars of spending from Obama, the US economy is stagnant and unemployment is higher than it was in 2008. [1] This happens for two reasons. First and foremost because high spending levels must be funded by high taxation levels that stifle individuals’ purchasing power and the private sector as a whole. Secondly, government spending generally causes higher inflation, meaning that the net effect of government spending in real terms is negligible, and only makes the system more inefficient! [2]  

[1] Powell, Jim: “Why Government Spending Is Bad For Our Economy”, Forbes, 10/13/2011, http://www.forbes.com/sites/realspin/2011/10/13/why-government-spending-is-bad-for-our-economy/

[2] ibid

To pay for his government programs, Obama supports a progressive tax system, with higher taxes for the rich, and lower taxes for the middle class. The need for such a system of taxing the rich to pay for government services has grown since 1980, when income gains between the rich and the poor began to diverge at a faster pace. [1] Recent data shows this trend continuing: in 2011 the wealthiest Americans got richer while median income fell by 4%. [2] Despite these trends, the top marginal tax rate is at nearly an all-time low! [3]

Increasing tax on individuals who earn more than $250,000 and even more for multi-millionaires because the marginal utility of wealth is lower for the super-rich than it is for the poorer. In other words, a millionaire is not particularly worse off if he or she is worth $10 million instead of $15 million. $5 million when spent on welfare programs such as pensions, education, healthcare or housing produces vastly greater utility. We thus see how a progressive tax system ensures a more efficient management of wealth across the economy.

Obama proposes to rake in more government revenue by raising the top marginal tax rate and instituting the Buffet Rule (a stipulation in President Obama’s plan which would apply a minimum tax rate of 30% to individuals making over $1 million per year). Crucially, Obama plans to continue to cut taxes for the middle classes in order to increase their purchasing power and stimulate the economy. [5]

As the 2012 presidential election approaches, President Obama’s long-term focus has been primarily on decreasing the federal debt, estimated at about $15 trillion. Specifically, Obama’s plan, detailed on his website, targets tax loopholes for households with annual incomes over $250,000, via efforts such as the Buffet Rule, while simultaneously reducing taxes for middle-class families and small business owners. [6] In September, President Obama revealed a plan to reduce the deficit by about $3.2 trillion in the next ten years. [7] This will be achieved through an increase in taxation of the nation’s wealthiest, and cuts in spending to the armed forces – as Obama plans to end American involvement in Iraq and Afghanistan.

[1] Centre on Budget and Policy Priorities: “A Guide to Statistics on Historical Trends in Income Inequality”, March 5 2012, http://www.cbpp.org/cms/index.cfm?fa=view&id=3629

[2] Nocera, Joe: “Romney and the Forbes 400”, The New York Times, September 24 2012, http://www.nytimes.com/2012/09/25/opinion/nocera-romney-and-the-forbes-400.html?_r=1&

[3] Tax Policy Centre, http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213 , accessed 8/10/2012

[4] The White House, http://www.whitehouse.gov/economy/buffett-rule , accessed 8/10/2012

[5] Politifact: “Barack Obama said he’s cut taxes for ‘middle-class families, small businesses’”, http://www.politifact.com/truth-o-meter/statements/2012/sep/07/barack-obama/barack-obama-said-hes-cut-taxes-middle-class-famil/ , accessed 8/10/2012

[6] Barack Obama Website, http://www.barackobama.com/taxes?source=primary-nav , accessed 8/10/2012

[7] The White House, http://www.whitehouse.gov/omb/budget , accessed 8/10/2012

Raising taxes for individuals with income over $250,000 will have a hugely detrimental outcome. This is because a huge number of small businesses are legally taxed as individuals. Raising taxes may be manageable for wealthy individuals, but small firms will be crushed by such huge tax increases proposed by Obama. The effects of this will be hard felt across the country, since small firms employ half of all private sector employees in the USA. [1] These small companies will see their investing and spending power vastly reduced and will lead to thousands of redundancies that will ensure the American economy remains stagnant! Low taxes are the key to economic growth, not high taxes and government spending.

[1] US Small Business Administration, FAQs, http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24 , accessed 8/10/2012

President Obama believes in an activist government’s role in improving society. Without public intervention, private markets will not sufficiently address inequality or several other public needs, such as environmental preservation and public transportation. Financial returns from investments in such areas are often insufficient to incentivise private sector investment. However such schemes generate high levels of welfare benefits that are desirable from a societal perspective.

Obama’s economic policy draws on Keynesian economic theory, which is the belief that a mixed economy of public and private enterprise, bolstered by a strong welfare state, can jumpstart the economy. In order to create public enterprise, the government needs to spend, either by building a deficit or from tax revenue.[1] This is the policy he has pursued in his first term with a successful stimulus of $787 billion.[2]

Obama’s tax policy boils down to the empirical belief that taxing the rich will help the economy grow, because the revenue can be used on important government programs that can spur growth, and the philosophical argument that the American economy should be more equal and that the U.S. government can and should do more to directly address inequality. It should therefore not be a surprise that Obama wants the Bush era tax cuts for the richest reversed arguing "I just believe that anybody making over $250,000 should go back to the income tax rates we were paying under Bill Clinton."[3]

[1] Blinder, Alan S., “Keynesian Economics”, The Concise Encyclopedia of Economics, 2^nd Ed., 2008, Library of Economics and Liberty, http://www.econlib.org/library/Enc/KeynesianEconomics.html

[2] Grunwald, Michael, “Think Again: Obama’s New Deal”, Foreign Policy, Sept/Oct 2012, http://www.foreignpolicy.com/articles/2012/08/13/think_again_obamas_new_deal

[3] Bendery, Jennifer, “Obama Calls For One-Year Extension Of Bush-Era Tax Cuts For First $250,000 Of Income”, Huffington Post, 9^th July 2012, http://www.huffingtonpost.com/2012/07/09/obama-bush-tax-cuts-middle-class_n_1659284.html

Government spending of the level advocated by Obama will only lead to a handicapped economy riddled with inefficiencies.

The figures alone suggest that the Keynesian theory of increased spending stimulates growth and reduces unemployment is a myth. Despite trillions of dollars of spending from Obama, the US economy is stagnant and unemployment is higher than it was in 2008. [1] This happens for two reasons. First and foremost because high spending levels must be funded by high taxation levels that stifle individuals’ purchasing power and the private sector as a whole. Secondly, government spending generally causes higher inflation, meaning that the net effect of government spending in real terms is negligible, and only makes the system more inefficient! [2]  

[1] Powell, Jim: “Why Government Spending Is Bad For Our Economy”, Forbes, 10/13/2011, http://www.forbes.com/sites/realspin/2011/10/13/why-government-spending-is-bad-for-our-economy/

[2] ibid

To pay for his government programs, Obama supports a progressive tax system, with higher taxes for the rich, and lower taxes for the middle class. The need for such a system of taxing the rich to pay for government services has grown since 1980, when income gains between the rich and the poor began to diverge at a faster pace. [1] Recent data shows this trend continuing: in 2011 the wealthiest Americans got richer while median income fell by 4%. [2] Despite these trends, the top marginal tax rate is at nearly an all-time low! [3]

Increasing tax on individuals who earn more than $250,000 and even more for multi-millionaires because the marginal utility of wealth is lower for the super-rich than it is for the poorer. In other words, a millionaire is not particularly worse off if he or she is worth $10 million instead of $15 million. $5 million when spent on welfare programs such as pensions, education, healthcare or housing produces vastly greater utility. We thus see how a progressive tax system ensures a more efficient management of wealth across the economy.

Obama proposes to rake in more government revenue by raising the top marginal tax rate and instituting the Buffet Rule (a stipulation in President Obama’s plan which would apply a minimum tax rate of 30% to individuals making over $1 million per year). Crucially, Obama plans to continue to cut taxes for the middle classes in order to increase their purchasing power and stimulate the economy. [5]

As the 2012 presidential election approaches, President Obama’s long-term focus has been primarily on decreasing the federal debt, estimated at about $15 trillion. Specifically, Obama’s plan, detailed on his website, targets tax loopholes for households with annual incomes over $250,000, via efforts such as the Buffet Rule, while simultaneously reducing taxes for middle-class families and small business owners. [6] In September, President Obama revealed a plan to reduce the deficit by about $3.2 trillion in the next ten years. [7] This will be achieved through an increase in taxation of the nation’s wealthiest, and cuts in spending to the armed forces – as Obama plans to end American involvement in Iraq and Afghanistan.

[1] Centre on Budget and Policy Priorities: “A Guide to Statistics on Historical Trends in Income Inequality”, March 5 2012, http://www.cbpp.org/cms/index.cfm?fa=view&id=3629

[2] Nocera, Joe: “Romney and the Forbes 400”, The New York Times, September 24 2012, http://www.nytimes.com/2012/09/25/opinion/nocera-romney-and-the-forbes-400.html?_r=1&

[3] Tax Policy Centre, http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213 , accessed 8/10/2012

[4] The White House, http://www.whitehouse.gov/economy/buffett-rule , accessed 8/10/2012

[5] Politifact: “Barack Obama said he’s cut taxes for ‘middle-class families, small businesses’”, http://www.politifact.com/truth-o-meter/statements/2012/sep/07/barack-obama/barack-obama-said-hes-cut-taxes-middle-class-famil/ , accessed 8/10/2012

[6] Barack Obama Website, http://www.barackobama.com/taxes?source=primary-nav , accessed 8/10/2012

[7] The White House, http://www.whitehouse.gov/omb/budget , accessed 8/10/2012

Raising taxes for individuals with income over $250,000 will have a hugely detrimental outcome. This is because a huge number of small businesses are legally taxed as individuals. Raising taxes may be manageable for wealthy individuals, but small firms will be crushed by such huge tax increases proposed by Obama. The effects of this will be hard felt across the country, since small firms employ half of all private sector employees in the USA. [1] These small companies will see their investing and spending power vastly reduced and will lead to thousands of redundancies that will ensure the American economy remains stagnant! Low taxes are the key to economic growth, not high taxes and government spending.

[1] US Small Business Administration, FAQs, http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24 , accessed 8/10/2012

Romney believes the best way to improve society is not to spend huge amounts of taxpayer dollars on inefficient government programs, but rather to tax citizens less and allow free-market innovation to improve the quality of life in America. Low taxes are necessary to stimulate innovation and the growth of business because people and businesses are self-interested; they will only invest when they believe they will get the profits from their investment and lowering taxes mean that they will get more of the profit from their investment.[1] At the same time government is a poor manager of the economy because small numbers of people cannot calculate all the effects of central planning and the impact it will have on individuals choices, essentially the market is simply too complex for the government to master so the best option is to reduce government interference as much as possible.[2] For this reason, Romney’s policy preference of lower taxes is coupled with a proposal to cut spending on a wide range of social programs.

Romney also outright rejects the idea of “redistribution” of wealth [3], believing it is unfair to those who have worked hard to build businesses and establish their own well-being. The protection of private property is central to the American political system, and taking from one group of citizens to give to another violates the right of private property. [4] In addition to being unfair, it is impractical, as it creates a disincentive for business people to further increase their wealth by working and investing in businesses that would grow the economy and create more jobs.[5]

[1] Thurow, Lester C., “Profits”, The Concise Encyclopedia of Economics, 2^nd Ed., 2008, Library of Economics and Liberty, http://www.econlib.org/library/Enc/Profits.html

[2] "Friedrich August Hayek." The Concise Encyclopedia of Economics. 2^nd ed., 2008. Library of Economics and Liberty. http://www.econlib.org/library/Enc/bios/Hayek.html

[3] Becker, Kyle: “Mitt Romney: We believe in free markets and free people, not wealth “redistribution””, Independent Journal Review, September 19 2012, http://www.ijreview.com/2012/09/16615-mitt-romney-free-markets-and-free-peoples/

[4] Dorn, James A.: “Ending Tax Socialism” September 16 1996, http://www.cato.org/publications/commentary/ending-tax-socialism , accessed 8/10/2012

[5] Li, Wenli & Satre, Pierre-Daniel: “Growth Effects of Progressive Taxes”, US Federal Reserve, November 2001, http://www.federalreserve.gov/pubs/feds/2002/200203/200203pap.pdf

The private sector has indeed been the source of much innovation that has led to improvements in standards of living. However the problem with relying solely on the private sector for social welfare, is that it can only improve the lives of those who can pay for it! It may well be the case that healthcare is better under the private sector, but if only the top 60% (say) of the country can afford it, there is a big problem! Moreover, as has already been mentioned, there is often insufficient financial incentive for the private sector to invest in certain areas, like pharmaceutical development or green energy research. Here, the government must step in and in the interest of public welfare provide the investment needed.

High level-taxation on wealthy individuals may be hard on them, but ultimately is desirable. Ethically speaking, we need to balance the harm of a millionaire losing a small portion of his or her wealth, with the enormous social good that can arise if that wealth was spent on social welfare programs. An extent of “redistribution” of wealth is thus fair and just. 

With a national unemployment rate of 8.1% as of September 2012 [1], the United States economy has not recovered from the global financial crisis of 2008 and the recession that followed it. Governor Mitt Romney’s plan to cut taxes would lessen the burden on American citizens, and spur businesses and entrepreneurs to create more jobs.

Governor Romney advocates a Reagan-esque devotion to laissez-faire economics, arguing that with substantial tax cuts and limited regulation on private businesses, the economy will naturally grow. Mr Romney states on his website that he would reduce government spending from its current level, around $33,000 per household, to around $25,000, while maintaining individual tax rates but decreasing rates for private corporations. [2]

Regarding government programs, Governor Romney opposes President Obama’s spending, vowing to repeal Mr Obama’s healthcare act, saving the country around $95 billion, according to his website. He also has advocated cutting spending on social programs by 5 % (without touching national security spending) and pulling funding from the National Endowment of the Arts and Humanities, the Corporation for Public Broadcasting, and the Legal Services Corporation. Furthermore, he plans to save up to $100 million by reducing foreign aid.

The budget deficit will be reduced despite the proposed tax-cuts. This is because tax cuts will have a positive effect on growth, while the spending cuts and clamp down on loopholes and inefficiencies will also help cut the deficit.

Overall, Mitt Romney’s economic policies boil down to taxing less and spending less, allowing the free market to work uninhibited. As with Obama, Romney’s position on this issue reflects his broader beliefs about the problems facing America. His plan to eliminate Title X Family Planning funding, for example, draws quite publicly from his opposition to abortion rights. While, also like Obama, his main concern is lowering the national deficit and paying back the national debt, the ways he would go about it are very different from those of his opponent, and realistically would benefit very different types of Americans.

[1] Google Public Data, http://www.google.com/publicdata/explore?ds=z1ebjpgk2654c1_&met_y=unemployment_rate&idim=country:US&fdim_y=seasonality:S&dl=en&hl=en&q=us+unemployment , accessed 8/10/2012

[2] Mitt Romney Website, http://www.mittromney.com/issues/spending , accessed 8/10/2012

Deregulating the market is precisely what is not required at the moment. The financial crisis of 2008 caused by irresponsible banking has shown that more than ever, regulation is necessary to ensure that corporations act responsibly and recognise the significance of social good, not just financial profit.

Cutting Medicare will lead to huge numbers of people no longer having access to affordable healthcare. Romney talks of this scenario as if a market without Medicare would be better because people would be able to choose one of the more competitive, more efficient private insurance companies for their health care. Once more however, this is only applicable for those who can afford such a choice! Not providing a safety net and preventing millions of people from attaining treatment for illnesses or chronic conditions is a huge failing from the part of the government.

Lastly, it is not true that cutting spending and taxes reduces the budget deficit. This was exactly the policy tried by George W. Bush and only led to a widening of the budget deficit and an increase of the total federal debt. By contrast, Obama’s plan of cutting inefficiencies and increasing tax on the country’s wealthiest has already been tried and tested under President Clinton and it resulted in a budget surplus.