James Pethokoukis

Politics and policy from inside Washington

Obama’s upside-down tax reform

Apr 14, 2011 19:34 UTC

Larry Kudlow notices on part of the Obama budget/speech that doesn’t seem to echo Bowles-Simpson:

We thought tax reform meant lowering rates and broadening the base by eliminating or cutting back on various deductions, credits, and loopholes. That’s what the Bowles-Simpson commission proposed. That’s what Paul Ryan and David Camp are working on. And that’s the pro-growth model.

But President Obama unveiled a much different tax-reform vision in his much-anticipated debt speech on Wednesday. He would raise tax rates on upper-income earners and small businesses. He also would eliminate deductions and credits, or so called “tax expenditures.” The president referred to these tax-expenditure reductions as “spending cuts.” In his context, they most certainly are not. They are more tax hikes.

Basically, the president is giving successful earners and small-business filers a double tax hike. That’s what it really is.

Of course, the president’s formula of estimating higher revenues to lower the deficit is completely wrong. The reality is that higher tax rates will slow the economy, inhibit new start-up companies, penalize investors, and may very well lose revenues and increase the deficit. In the latter part of his speech the president did mention some kind of middle-class and corporate tax reform. But he gave no specifics.

COMMENT

Everybody should pay an equal percentage of taxes. If you only bring in a cute little 15k a year then maybe you should take your pell grants and go to school so you can do something useful with your life. Whoever thought penalizing the successful was a good idea was clearly not very successful.

Posted by JKHazen | Report as abusive

The big hole in Obama’s budget plan

Apr 14, 2011 08:01 UTC

Did the White House A/V dude load the wrong file into Obama’s teleprompter? While the president’s class-warfare attack on Paul Ryan’s “Path to Prosperity” would probably have earned rousing applause at a Jefferson-Jackson dinner, the speech failed to accomplish its advertised purpose: outlining Obama’s long-term blueprint to avoid a debt crisis.

Even if a) his doubling-down on Obamacare’s unproven cost controls works and b) his trillion-dollar tax increases don’t slow the economy, this new plan only stabilizes government debt as a share of the economy for maybe a dozen years. After that, the march to financial crisis continues apace.

Of course, if Obama had actually offered a multi-decade blueprint, like Ryan did, he would have had to concede that there’s no way he can pay for all his spending over the long term without Washington raising taxes on the middle-class and probably instituting a value-added tax. (On that count, one nonpartisan budget expert told me, the Obama plan is “ridiculous.”) As I wrote a few days ago:

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 America’s aging population – 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.)

Now that’s no way to launch a reelection campaign. It’s also no way to win the economic future. Yesterday, the International Monetary Fund kvetched that the White House had no credible plan in place to cut U.S. debt. Some 24 hours later, it still doesn’t.

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