James Pethokoukis

Politics and policy from inside Washington

Obama’s not-so-secret plan to raise taxes

Oct 1, 2009 03:18 UTC

Does President Obama have a secret plan to raise taxes on middle-class Americans — and,well, pretty much everybody else — with a European-style, value-added tax? Actually, it’s not such a big secret. Connect the dots:

1) The joint statement from the just-concluded G20 Summit in Pittsburgh called for balanced global growth — which means Americans must spend less and save more and reduce its budget deficit.

2) That same weekend, John Podesta, co-chairman of Obama’s presidential transition team and an outside White House adviser, tells a Bloomberg reporter that a value-added tax is “more plausible today” than ever, adding that “there’s going to have to be revenue in this budget.” A VAT is a kind of consumption tax.

3) Yesterday, the Center for American Progress, the liberal think tank with close White House ties, holds a conference on the rising national debt. While speaker after speaker — Paul Krugman, Roger Altman, CAP President Podesta (again), Laura Tyson — admits entitlement spending must be reduced, they also agree that taxes must be raised. Altman suggests $400 billion in new tax revenue is needed almost immediately to calm financial market fears, and a VAT would be a great way of doing it. That’s $400 billion a year, by the way, not over ten years.

4) Also, yesterday was the first meeting of President Obama’s tax reform panel led by former Federal Reserve Chairman Paul Volcker. In a two-part interview with Charlie Rose airing yesterday and today, Volcker says that if Washington can’t get spending under control, either a VAT or a carbon tax would be effective revenue raisers. “Those are two big ones,” he says.

5) As they used to say in the Soviet Union, “It’s no coincidence.” This is also the conclusion of one Washington insider with ties to the White House economic team: “Does this all add up to a trial balloon? Of course, it’s a trial balloon. And I expect the administration will propose major tax reform, including a VAT.”

Obama’s campaign promise to not raise taxes on households making less than $250,000 a year was always considered a joke here inside the Beltway. It’s the economic “consensus” — and this was true even before the financial meltdown and recession — that rising entitlement costs would eventually mean a higher tax burden for the American people.

Maybe it was a joke inside the campaign, too. Since being elected, Obama has raised cigarette taxes and has advocated raising healthcare taxes, energy and small business taxes, in addition to corporate taxes. What’s more, economic advisers like Larry Summers seem eager to get rid of all the Bush tax cuts, not just those on so-called wealthy Americans.

And it’s also no secret that economists love the idea of a VAT. It promotes savings over consumption, and its hidden nature may mean it has less behavioral impact on taxpayers. Conservative economist Bruce Bartlet puts it this way, “As a broad-based tax on consumption, it creates less economic distortion per dollar of revenue than any other tax–certainly much less than the income tax.” Indeed, a VAT is part of cash-strapped California’s newly proposed tax reform.

Liberals love the idea of a VAT because it’s, well, so European — also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.

See, even after the recession, there might be a 6 percentage point difference between what Uncle Sam spends as a percentage of GDP and what it takes in. Liberals like Krugman have no problem with making up that difference purely through higher taxes, even though that translates into raising the national tax burden by at least a third. And that, even though such a massive hike might well have a crushing effect on growth.

Obama wants a VAT? First, it should be part of broader tax reform, including getting rid of capital gains and corporate taxes. Second, it should accompany an Economic Bill of Rights much like Ronald Reagan used to suggest. Its elements: a) a balanced budget amendment, b) a line-item veto, c) a spending limit such as inflation plus population growth, d) and a two-thirds vote in the House and Senate for any tax increases. (Reagan also wanted a prohibition on wage and price controls. That would likely kill ObamaCare.)

And come to think of it, let’s cut spending and streamline government before cash-strapped, wealth-reduced taxpayers are forced to pony up a penny more, OK?



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The cap-and-trade endgame on Capitol Hill

Sep 30, 2009 16:54 UTC

The great Dan Clifton of Strategas Research hears the same thing I am hearing:

We continue to believe the Senate does not have 60 votes for a meaningful cap and trade bill and today’s events are largely designed to keep the process moving. With healthcare taking up so much of the calendar and financial regulation to follow, cap and trade is now squarely put into the election calendar. Should something pass next year, we expect the legislation to a be a stripped down energy bill (as opposed to cap and trade) and that will feature a Renewable Portfolio Standard and possibly easing of approval for transmission lines.


Still, we can not take it for granted. Proposed cap and trade legislation would cost Americans thousands in increased energy costs as well as lost jobs. Write to Congress at http://tiny.cc/pxIgi.

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Will financial markets force a $400 billion tax hike or a VAT?

Sep 30, 2009 16:51 UTC

So I am at this CAP thing on the deficit where talk of higher taxes was hot and heavy. Both Robert Rubin and Roger Altman both seemed to imply that the financial markets will force action sooner rather than later on the deficit — and that means higher taxes.

Outside WH adviser and CAP president John Podesta was talking up the VAT over the weekend, and Altman said today that the WH will have to start doing $500 billion to $700 billion a year in annual deficit reduction during this term. Maybe $400 billion of that should come through higher taxes such as a national VAT.

Definitely the Wall Street guys seemed more worried than the academics like Alan Blinder or Laura Tyson about the near-term importance of deficit reduction. Blinder, also former Vice Chair of the Fed, says he could envision the dollar crashing because of American fiscal problems. And Tyson though the balance-sheet recession and expiration of the Bush tax cuts would mean slow growth ahead for the US economy.


It could have aided dilute not just racism as is taking place now but also homophobia. The guy has a lot more talent than any other idol I’ve observed. He places inside a 100% effort into all his performances unlike Kris.

Charlie Cook: 33-50 percent chance Dems lose House in 2010

Sep 30, 2009 16:39 UTC

I was at a Center for American Progress conference on the deficit this AM where respected political analyst Charlie Cook talked about the 2010 congressional midterms.  He said he thought there was a 1-in-3 to 1-in-2 chance that the Dems could lose the House of Representatives. Among his reasons:

1) Record drop in party ID where a 17 percent D edge has dropped to 5 over the summer.

2) An eight point drop in Obama’s approval rating over same period from 60 to 52.

3) Obama approval among independents has dropped to the low 40s. They are very worried about deficit and hyperactive government. Cook called it “visceral.”

4) Cook notes that more than 80 D House seats are in districts won by McCain in 2008 or Bush in 2004. And 48 are in districts won by both McCain and Bush in 2008 and 2008.

5) Dems could lose “a few” Senate seats, but then are set up for lousy 2012 and 2014 where they have to defend a lot of seats because of their big 200 and 2008 wins.

6) He thinks Obama should have given Bush more credit for rescuing economy at end of 2008.


It’ll be much more likely if Nancy Pelosi remains the Speaker.

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M2M and the financial sector rebound

Sep 29, 2009 18:47 UTC

Ed Yardeni and mark-to-market accounting:

Do you recall “Time of the Season” sung by The Zombies in 1968? The Q3 earnings season is about to start. For the third quarter in a row, there will be fewer zombies in the S&P 500. These were the living dead companies that finally died during 2008, or they survived and are mostly coming back from the dead. Many of them are in the Financials sector. They could deliver some big positive earnings surprises during Q3 thanks to the suspension of mark-to-market accounting on April 2. … The Doomsters were quick to add up all the write-offs they projected as the financial crisis intensified largely as a result of the death spiral attributable to marking the value of assets into the oblivion of extremely illiquid or nonexistent markets. It was insane that the MTM rule wasn’t suspended sooner. Yet both Ben Bernanke and Hank Paulson insisted that it would be unwise to change the rule in the midst of a crisis. They were dead wrong as evidenced by the extraordinary rebound in the stock market ever since March 12, when Rep. Gary Ackerman, my Congressman, leaned on Robert Herz, the head of FASB, to suspend the rule, which is what he did on April 2. The grand total of all the write-offs attributable to the financial crisis is now likely to fall quickly.


I do not even know how I ended up here, but I thought this post was great. I don’t know who you are but definitely you are going to a famous blogger if you are not already Cheers!

Ron Paul and the Fed

Sep 29, 2009 17:46 UTC

First of all, thanks to my good friend Stan Collender over at the Capital Gains and Games blog who has jumped to my defense (and that of Bruce Bartlett) vs. the misguided Ron Paul supporters who interpret any criticism of the congressman’s ideas as proof of membership of some global conspiracy.

You know, it is possible to  think both a) overly easy monetary policy was a contributing factor in the economic crisis, and b) Fed actions helped prevent the recession from being worse than it was. And as far as the audit bill goes, letting Congress have greater influence on monetary policy would only result in a Fed that was less vigilant about inflation.

Better they focus their efforts nudging the Fed toward policies based in forward-looking market metrics as opposed to backward-looking economic indicators like the unemployment rate. But their dime, their dance floor.


No, Our dime, our dance floor, what is wrong with the way you think? You certainly will never know.

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Robert Zoellick and the return of the Washington Consensus

Sep 29, 2009 17:27 UTC

If World Bank President Robert Zoellick were running a stealth campaign to become the next Republican Treasury Secretary, he might have given a speech very much like the one he just gave at Johns Hopkins University.

In it, Zoellick, who was nominated by President George W. Bush in 2007, advocated policies to reinforce the dollar, warned about rising protectionism and told the Obama administration that the core of its financial regulatory reform effort was wrongheaded.

Then again, we’re a mere nine months into the current U.S. presidential administration. So it is probably safer to assume that Zoellick was merely doing his part to provide a useful blueprint for how the world’s largest and most important economy should best operate.

And a smart and savvy blueprint it is. Probably the piece getting the most attention is Zoellick’s skepticism about the White House plan for making the Federal Reserve the regulator of systemically important financial institutions.
“In the United States, it will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority,” he said.

Difficult, at least, if you value keeping the Fed independent from political meddling, which Zoellick certainly does. He would prefer the Treasury gain an expanded regulatory role, with the Fed focusing on monetary policy and perhaps monitoring markets for systemic risk and financial bubbles.

Of course, this is exactly the opposite of the reform being pushed by the Obama administration, where Treasury would head a systemic risk monitoring council with the Fed keeping watch on the actual firms.

Zoellick also outlined the challenges to the dollar. Yes, he acknowledged, America is entering a multipolar financial reality where the euro, yen and yuan will be increasingly viable currency options. There is nothing to be done about that. In fact, it is good news to the extent that it reflects the success of capitalism in Asia.

What the United States does need to do is get control of its fiscal deficit and take measures to speed the “return of a dynamic, innovative private sector economy.”

A strong economy will result in a strong and stable dollar. Zoellick certainly gave no indication that he agreed with the Obama policy of benign neglect in order to help exports and de-emphasize the long-term role of the U.S. consumer in global growth.

But perhaps Zoellick’s most important comments were those warning the United States and other advanced economies that if they don’t keep pushing forward on trade, the forces of protectionism — such as those encouraging tire tariffs today and carbon tariffs tomorrow — will fill the policy void.

“Given the local pulls of protectionist producers in most countries, the only way to counter their gravitational force is by forging forward with a liberalizing trade agenda,” he said.

But trade hasn’t been a priority with the Obama administration. C. Fred Bergsten, director of the Peterson Institute for International Economics, speculates that this disinterest is a result of a) Democrats being split on the issue and b) an overstuffed policy agenda.

But maybe Zoellick’s word can serve as a nudge in the right direction for Washington, as well as London, Berlin, Paris, Tokyo and Beijing.

His speech served as a great reminder that fiscal discipline, independent central banks, free trade and the leading role of the private sector — the tenets that used to be called the Washington Consensus — will continue to be important in creating global economic growth and prosperity in the future.

The Fed as a growth driver

Sep 28, 2009 17:11 UTC

Does the Obama administration care more about creating wealth or redistributing wealth? Maybe the strategy is for the WH to worry about the latter and let the Fed take care of the former. Scott Grannis, the Calfia Beach Pundit, makes an interesting observation (bold is mine):

Many, including most Fed governors, fear that an early reversal of quantitative easing, which would undoubtedly require higher short-term interest rates, might jeopardize the economy’s nascent recovery. I think it makes more sense to worry about what might happen if the Fed waits too long. I seriously doubt that this economy is so fragile that it can’t support short-term interest rates of at least 2-3%. I really worry that an inflationary error from the Fed at this point, which would weaken the dollar and undermine confidence in the U.S. economy, would do far more damage. Far better to pursue a path that builds confidence in the strength of the dollar, rather than gambling everything to boost the economy. Monetary policy was never designed to be a tool for raising or lowering the economy’s growth rate.


Dear James: Aecon for sure has a headache in Quito, Ecuador. For starters you should know Aecon started an Airport, an aeronautical project, without any studies which would confirm that Tababela, the site chosen, is a good place for an airport. As a matter of fact, my person, unveiled hidden past studies that confirmed that Tababela was not a good site to build that airport. That airport has been a shame for the canadian Government because corrupt canadians broke the law in Ecuador and lied to the american investment companies in several ways.International entities rule normally in favor of airport fees as public not private. ICAO(international civil aviation administration orgaization) regulations apply here because these corrupt canadian companies are building an international airport. Furthermore, BOT(build operate and transfer) contracts, specify that the canadians are supposed to build that airport with their funds , at their own risk.When they admit that they are using airport fees from one ecuadorian airport to build the other they are admiting that they are breaking the law, and it is enough proof for the american financists that their Project Finance Model will fail. Canadians may mean angels and bells to you but they are a corrupt government who are experts in arms deals, have a horrible nature contamination record in the mining business. So you know, I am an american citizen, no I am not a leftist. Get your facts straight, will you?. Next time you visit Ecuador, look me up and do not ride the coattails of Stockwell Day, a man who is part of the Sting.Fernando Lopez (see you in Ecuador) bring your eyes open

Climate change: 3.6 degrees or $46 trillion

Sep 28, 2009 17:02 UTC

They may not know all the stats and numbers, but people instinctively don’t seem to want to pay a lot of dough to limit carbon emissions. Not even close.  In fact, you can find plenty of climate experts who doubt they ever will, particularly in India and China. Betting on mitigation and technology seems the more realistic route. A bit from Bjorn Lomborg:

Urged on by environmental activists, many politicians are vowing to
make carbon cuts designed to keep expected temperature rises under 3.6
degrees (2.0 Celsius). Yet it is nearly impossible for these promises
to be fulfilled.

Japan’s commitment in June to cut greenhouse gas levels 8 percent
from its 1990 levels by 2020 was scoffed at for being far too little.
Yet for Japan — which has led the world in improving energy efficiency
– to have any hope of reaching its target, it needs to build nine new
nuclear power plants and increase their use by one-third, construct
more than 1 million new wind-turbines, install solar panels on nearly 3
million homes, double the percentage of new homes that meet rigorous
insulation standards, and increase sales of “green” vehicles from 4
percent to 50 percent of its auto purchases.

Imagine for a moment that the fantasists win the day and that at the
climate conference in Copenhagen in December every nation commits to
reductions even larger than Japan’s, designed to keep temperature
increases under 2 degrees Celsius. The result will be a global price
tag of $46 trillion in 2100, to avoid expected climate damage costing
just $1.1 trillion, according to climate economist Richard Tol, a
contributor to the Intergovernmental Panel on Climate Change whose cost
findings were commissioned by the Copenhagen Consensus Center and are
to be published by Cambridge University Press next year.

Update: A good post from John Tierney on why government isn’t doing more to look for technological fixes like atmosphere scrubbing.


your updated link 404′s me.

Hey, Ron Paul, end the Fed … as financial regulator

Sep 28, 2009 16:38 UTC

If not for unprecedented actions by the Ben Bernanke-led Federal Reserve, the United States economy might be mired in a depression.

Yet the Fed finds itself on the defensive on Capitol Hill. There was its general counsel, Scott Alvarez, pleading last week to the House Financial Services Committee to reject attempts to expand Government Accountability Office audits of the Fed. Already, the GAO reviews the central bank’s supervisory and regulatory functions. But a bill introduced by Representative Ron “End the Fed” Paul, a Texas Republican, would also subject monetary policy and discount window operation to GAO audits. The bill has nearly 300 co-sponsors and as well as conceptual approval by Barney Frank, chairman of the committee.

The Fed views these expanded audits as threats to its independence from political pressure. As Alvarez put it, “These concerns likely would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.”

For instance, when it comes time for the Fed to start withdrawing monetary stimulus from the economy despite continuing high unemployment, the last thing it will need is haranguing from Capitol Hill that it’s moving too fast, too soon.

And if the Fed becomes the regulator of systemically important financially institutions, as the White House advocates, it’s easy to imagine how the central bank would be subject to even more intense and frequent grilling from an emboldened Congress.

Now the move for expanded Fed audits results from both the Fed’s unprecedented efforts to end the financial crisis and its regulatory failures that contributed the financial crisis. The audit bill should be a wakeup call to the central bank that the more it gets involved in the regulatory process, the great future scrutiny from a skeptical Capitol Hill.

And it’s not just Congress. World Bank President Robert Zoellick says that after reviewing the Fed’s regulatory performance, he’s concluded that it’s a bad idea to “vest the independent and powerful technocrats at the Federal Reserve with more authority.”

Past regulatory failures have already undercut confidence in the Fed – “technocrats” is hardly a compliment — and breaking new regulatory ground in the field of systemic risk increases the chances for further erosion. As it is, the Fed is already buckling to congressional pressure. Alvarez told the committee that the Fed would be “happy to work” with lawmakers on ways to release names of companies that borrow from the central bank, perhaps after a period of time.

Not only should Congress reject the idea of expanded Fed audits, it should reject the idea of expanding the Fed’s role as regulator. If need be, create a new regulatory agency or council. Let Team Bernanke focus on executing its stimulus exit strategy and strengthening its reputation as an inflation fighter.


For those of you who want to end the FED, lets end the defense depart. The state dept. and Pentagon and our standing army as well. That would save an abundance of our tax money. We shouldn’t be in foreign countries anyway.And we should be promoting peace not war. Oh I forgot peace is not profitable, so that won’t happen. But don’t forget that we the people will have to join militias to protect our country since we won’t have an army anymore. I don’t know about you but I don’t think I would have the time or energy to join, I am too old. :)

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