Obama, Romney differ greatly on size of government

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 earlier this year, after the release of his fiscal 2013 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. House Budget Committee Chairman Paul Ryan, R-Wis., has said that his fiscal 2013 budget blueprint, which the presumptive GOP presidential nominee 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 and corporations—paying for the lower rates by eliminating unspecified tax breaks.

“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 recently 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 is betting that his vision will work.

Taxes

At a time when voters list jobs and the economy as their primary concern, talking about taxes may seem a bit off topic.

Still, taxation will take center stage in the weeks immediately after the election, when trillions of dollars in tax provisions will expire, from the Bush-era cuts 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-earners, 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 $480 billion in 2015, according to the nonpartisan Tax Policy Center.

In contrast, Obama wants to tweak the tax code by raising additional revenue from households that make over $250,000 a year. People in this bracket would see their rates rise. Taxes on the highest earners, for instance, would return to the 39.6 percent rate, up from the current 35 percent. Obama would further target people who earn more than $1 million a year. His second-term administration would try to limit their deductions, setting up a minimum tax for millionaires. 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 would establish a territorial tax system, which would tax corporations only on income earned in the United States, and reduces 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 two candidates again represent polar opposites. Romney pledges to significantly reduce federal spending, even as he calls for huge tax cuts. Obama prefers to spend money now on federal projects that he hopes 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, proposals 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 programs 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 such programs as farm subsidies and defense.

Romney, 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, Romney’s 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 tax and spending policies, though, Romney and Obama offer up drastically different strategies for traversing that path.