Why Obama’s tax pledge is bogus
Who does Team Obama think itâ€™s fooling? Budget experts are already scoffing at the idea that the White House can somehow deal with Americaâ€™s long-term budget woes without either a) raising taxes on the middle-class or b) adopting a Paul Ryan-style restructuring of entitlements.
But, amazingly, thatâ€™s just what White House senior adviser David Plouffe claims his boss is going to do on Wednesday in a big speech. Recall that this will be President Obama’s second bite at the apple. His previous attempt, released earlier this year, would have added an eye-popping $9.5 trillion of new borrowings over a decade, increasing debt as a share of output to 87 percent in 2021.
But that outline just looks like a placeholder now. Republican Ryan has proposed cutting Obamacare and trillions of dollars of other federal spending to keep the debt-to-GDP ratio steady at around 69 percent over the decade, adding $5.1 trillion in new borrowing and leaving a slim annual deficit of 1.6 percent in 2021 vs. a historically high 4.9 percent for Obama. And while Obama previously offered no long-term debt reduction plan, Ryanâ€™s “Path to Prosperity” would actually eliminate outstanding U.S. debt by the 2050s — even using the slow-growth forecast of the Congressional Budget Office.
Suppose Obama actually chooses to at least match Ryan and stabilize the debt over a decade. And assume he picks the formula advocated by his debt panel, $2 in spending cuts (spread among defense, Social Security, Medicare and Medicaid) for every $1 of higher taxes. Getting there by taxing only wealthier Americans would mean nearly doubling tax rates at his own line of demarcation â€“ households earning more than $250,000 a year, according to the Tax Policy Center. Â (This analysis assumes a top marginal rate of 67 percent would have no impact on economic growth. Good luck with that.)
Or maybe Obama could adopt the balanced-budget plan being put forward by liberal House Democrats. In addition to gutting defense, the plan of this group of so-called progressives would, as Philip Klein of Washington Examiner describes it, do the following:
To extend the long-term solvency of Social Security, it would propose dramatically increasing payroll taxes on both the employer and employee side, and funnelling the money into even more generous benefits. … Yet the tax increases wouldn’t end there. The People’s Budget would rescind last year’s tax deal to raise rates on higher income levels, boost taxes on capital gains and dividends, increase the estate tax, institute three “millionaire tax rates,” with the highest reaching 47 percent, tax corporate foreign income, impose a “financial crisis responsibility fee,” and institute a “financial speculation tax. Overall, taxes would rise to 22.3 percent of the economy, compared with 18.3 percent under the Ryan proposal.
Obama wonâ€™t go that far, especially since his economic team doesn’t believe it’s necessary to dramatically reduce the deficit anytime soon. Important, but not urgent. But he might well subject the full earnings of wealthier American to the payroll tax. (The cap is currently around $107,000.) In addition, expect the president to suggest eliminating all manner of business tax breaks. He might advocate cutting the top corporate rate, too, but not enough to prevent there being a net tax increase. Wall Street and Big Oil better brace themselves.
But the president is also promising a long-term fix. The further out one goes, however, the less feasible it is to spare the middle class as Obama promises. White House economists reckon Americaâ€™s aging population â€“ and its healthcare needs — means government will need to be bigger than its post-World War Two average of around 21 percent of GDP. (And this actually assumes Obamacare’s cost controls work.)
Yet the U.S. tax system has rarely generated anywhere near so much revenue as a share of output, much less two to four points higher or more. And it sure can’t by just taxing the “rich.” In that scenario, a value-added tax hitting everyone could well be needed. A 10-point VAT, layered onto the current system, would generate $3 trillion in revenue over ten years. (Again, assuming no negative economic impact.)
You almost assuredly wonâ€™t hear such a radical proposal from Obama on Wednesday. And that’ll mean he won’t be offering a serious, long-term budget blueprint, just a purely political way of framing the 2012 election. Obama can reject the Ryan plan or a VAT, but not both.