The
Budget
Every year, no later than the first
Monday in February, the President submits his budget proposal
to Congress. Using the President’s proposal as a reference,
Congress then writes its budget blueprint – called a “budget
resolution” – that it will use for the next fiscal
year. A budget resolution generally sets the dollar limits for
everything from appropriations (discretionary spending) to entitlement
programs (mandatory spending) to tax policies. It typically projects
the numbers for five years or more into the future. But while
a budget resolution may last several years, Congress usually rewrites
the budget every year to set annual spending targets and to incorporate
new policy ideas.
On February 6, 2006 President Bush submitted his
Fiscal Year 2007 budget recommendation to Congress. It contains
policies to maintain our strong economy by preventing automatic
tax increases, to cut the budget deficit in half by 2009, and
to provide the resources necessary to win the war on terror.
Preventing Automatic Tax Increases
The President’s budget proposes to make permanent
the dividend and capital gains tax rates, expensing for small
businesses, income tax rates, the increased child tax credit,
marriage penalty relief, and repeal of the estate tax.
In his State of the Union address this year, the
President noted that the tax changes Congress has enacted over
recent years have been very successful in pulling our economy
out of a recession, generating jobs, and improving standards of
living. Because of obscure Senate budget rules, however, the tax
provisions are already starting to expire. As the President said,
“If we do nothing, American families will face a massive
tax increase they do not expect and will not welcome.” I
oppose tax increases, and am working hard to prevent them because
I understand that Americans are not under-taxed; rather, the federal
government spends too much.
- Unless the tax relief is made permanent, millions
of Americans will face automatic tax increases, including nearly
two million Arizona families. (1) In 2011, income tax rates will
increase for all taxpayers, with the new 10 percent bottom bracket
going away completely, and taxpayers being throw into the 15 percent
bracket instead, affecting 1.7 million Arizona individuals and
families. And the top income tax rate – which is often called
the “small business rate” because many small businesses
are structured as pass-through entities – would jump from
35 percent to 39.6 percent, affecting nearly 400,000 Arizona filers.
- Congress has alleviated the marriage penalty by
doubling of the standard deduction and the parameters of the 15
percent bracket for married couples so that they are twice the
amount for singles. Unless the tax relief is made permanent, the
tax code will go back to punishing married couples, including
at least 587,000 Arizona families, after 2010.
- Through tax changes made in 2001, 2003, and 2004,
Congress set the child tax credit at $1,000 per child, but unless
the tax relief is made permanent, the child tax credit will be
cut in half in 2011, affecting about half a million Arizona families.
- The above-the-line deduction for college tuition
and expenses, claimed by over 74,300 taxpayers in Arizona and
3.6 million filers nationwide in 2004, expired at the end of 2005.
- The Saver’s Credit, a nonrefundable tax credit
that encourages low-income taxpayers to make contributions to
an employer-provided retirement savings plan or an IRA, is currently
scheduled to expire at the end of 2006. Almost 5.5 million filers
take advantage of this tax credit, including 97,700 filers in
Arizona.
- Tax rates on capital gains would jump in
2009 from 15 to 20 percent (a 33 percent marginal rate increase)
and taxes on dividends would jump from 15 percent to as high as
35 percent (an incredible 133 percent increase). Some like to
claim this tax change only benefits the wealthy but it is interesting
to note that nationwide, 67.5 percent of taxpayers reporting long-term
capital gains had incomes of less than $100,000 and 18.5 percent
had incomes under $30,000. More than 70 percent of taxpayers reporting
qualified dividend income had incomes of less than $100,000 and
19.2 percent had incomes under $30,000. In Arizona, nearly 130,000
filers reported long-term capital gains and over 315,000 filers
reported dividend income in 2004. Clearly, we are a nation of
investors.
Economic Growth
The American economy has rebounded
nicely from the 2001 recession and our growth is the envy of
the developed world.
- The reasons for our economic expansion are
many. American workers are incredibly productive and hard-working,
and they have been encouraged to work harder because Congress
reduced income tax rates in 2001 and fully implemented those marginal
rate cuts in 2003. As Arizona State University’s Nobel laureate,
Dr. Edward Prescott, explained in the Wall Street Journal on October
21, 2004, people tend to work harder and be more productive when
the tax imposed on their extra effort – the marginal income
tax rate – is lower.
- American entrepreneurs and businesses are
innovative, creating new and improved products and services that
are marketed around the world. These businesses have been able
to raise capital and invest in their business growth because in
2003 Congress changed depreciation rules for small businesses
and cut the tax imposed on capital gains and on dividend distributions,
making investments more attractive for businesses and investors
alike.
- As a result of these changes, the American
economy expanded by more than three percent each quarter for the
10 consecutive quarters following enactment of the 2003 tax relief
policies. For all of 2005, the American economy grew by 3.5 percent;
the unemployment rate fell to 4.7 percent in January of 2006;
and 4.7 million new jobs have been created since the 2003 tax
relief was enacted. Clearly, these policies have been a tremendous
success. It would be irresponsible and dangerous to our economy
to suggest raising taxes on American families, entrepreneurs and
investors, so I am working hard for the families of Arizona to
prevent this pending tax increase from being imposed.
American Families Are Not Under-Taxed
-
I reject the argument that American families
should pay even more in taxes to the federal government. Even
if the tax policies outlined above are made permanent, the share
of the economy that the federal government collects in taxes
will surpass the post-World War II average of 17.9 percent (2)
before 2010. The Congressional Budget Office projects that as
a share of the economy, revenue will be 17.7 percent of GDP
in 2006.
- This statistic – revenues as a percent
of GDP – is important because it measures how much money
the federal government is taking out of the private economy. The
more the federal government takes in taxes, the less it leaves
for families, entrepreneurs, and businesses to use to expand the
economy and improve standards of living.
The Federal Government Is Spending Too
Much
As explained above, American taxpayers are clearly
doing their part. The problem with the federal budget deficit
is not that Americans are under-taxed, but that the federal
government spends too much. The President’s budget proposes
to make a small dent in the growth of certain entitlement (mandatory
spending) programs and suggests holding discretionary spending
(annual appropriations) to the rate of inflation.
Mandatory/Entitlement Spending
- The greatest impending threat to our economy
comes from unsustainable growth in existing mandatory and entitlement
spending. Operating on auto-pilot, mandatory spending would grow
from just over half of total federal spending this year to two
thirds of total federal spending by 2015 – an annual average
growth rate of 6.0 percent, more than double the rate of inflation.
Some in Congress talk about “pay-as-you-go” (or “paygo”)
requirements for the federal budget, but the interesting thing
is that paygo would do absolutely nothing to address the unsustainable
trajectory of these mandatory and entitlement programs.
- The biggest entitlement programs –
Medicare, Medicaid, and Social Security – will put an increasing
burden on our children and grandchildren. Medicare and Medicaid
are projected to consume nearly one-third of total federal spending
by 2015, $2.8 trillion of which is to be spent on Medicaid alone
over the next decade. Under current law, Medicare spending will
total $390 billion in 2007, an increase of $52 billion over 2006,
or 15.3 percent. Without legislative changes, Medicare spending
will grow to $500 billion in 2011, an average annual growth rate
of 8.1 percent. Spending for Social Security will also soon overwhelm
the system; as the law stands, Social Security spending will total
$581 billion in 2007, an increase of $31 billion over 2006; this
spending will swell to $723 billion in 2011.
- The President’s 2007 budget proposes
that new or increased mandatory spending commitments be offset
by savings in equal amounts, and proposes other reforms that will
produce $65 billion in net mandatory savings over the next five
years. These proposals will not solve the problems in our entitlement
programs, but they will begin to address their unsustainable growth.
Discretionary Spending
In addition to slowing the pace of mandatory spending, the President’s
budget proposes to hold the growth of overall discretionary
spending (annual appropriations) below the rate of inflation
and proposes to cut non-defense, non-security discretionary
spending from current levels. In the Fiscal Year 2006 appropriations
process, Congress was able to hold the overall growth of discretionary
spending below the rate of inflation and actually cut non-security
appropriations over the previous year. I am confident that Congress
can do the same this year.
The President also proposed the creation of a
Results Commission to improve agency and program performance
and reduce unnecessary costs to taxpayers. Last year’s
budget proposed savings in non-security discretionary spending
by recommending the termination or significant reduction of
154 programs that were not getting results. Congress was able
to deliver savings to the taxpayer of $6.5 billion on 89 of
the President’s recommendations. This year, the President's
budget recommends terminating or reducing 141 programs that
are not getting results or not fulfilling essential priorities.
Curbing this inefficient spending will result in savings of
another $14.7 billion, and I favor doing so.
We also need to rein in the use of earmarks on
appropriations bills, which have become widely abused in Congress.
I am a cosponsor of Senator McCain’s bill to do this,
and I am actively working with the Republican leadership to
reform the earmarking process so that taxpayer dollars are not
spent on wasteful projects that have not been fully vetted before
being approved. Pet projects and earmarks contribute to unchecked
federal spending and deficits, and are a waste of taxpayers'
money. This new legislation would require super-majority support
in the Senate for any earmarks to be added onto federal spending
bills, and would also increase transparency and give Senators
more time to review spending packages.
Moreover, the budget requests that Congress
give the President a constitutional line-item veto, a provision
that I have supported in the past and will support again. All
savings from the line-item veto would be used for deficit reduction.
Allocating Resources to Win the War Against
Terrorism
The war on terror is a national priority. The
budget increases defense spending by nearly seven percent in
order to give our troops the resources they need to fight terror
and protect our nation. This funding will maintain a high level
of military readiness, develop and procure new weapons systems
to ensure U.S. battlefield superiority, and support our service
members and their families. In addition, the budget increases
non-defense homeland security funding by more than eight percent.
This increase provides resources to strengthen our borders,
including funding for more border patrol agents, detention and
removal personnel, and expedited removal of illegal immigrants,
and at my request specifically includes nearly $52 million for
border stations in Arizona.
(1) All statistics in this section on filers
impacted by tax policies are based on tabulations of all individual
income tax returns filed and processed through the IRS Individual
Master File during calendar year 2004.
(2) Historical Tables of the President’s FY 2007 Budget
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