James Pethokoukis

Politics and policy from inside Washington

The big hole in Obama’s budget plan

April 14, 2011

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.

Comments

The ideal implementation of VAT is in total sweeping tax overhaul — scrap the current tax code altogether as Mitch Daniels has envisioned ( http://wp.me/p18NCA-9n ), and balance the VAT with a flat (or tiered) personal income tax with a high threshold. Use the EITC to protect the lower brackets.

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The jobs and housing boom promised by House Budget Committee Chairman Paul Ryan relies upon an economic theory that has been rejected by both the chairman of the Federal Reserve Board and the International Monetary Fund.

You left that part out, didn’t you James?

The International Monetary Fund last fall concluded that deficit-cutting does produce long-term economic benefits. A lower stock of public debt allows interest rates to fall, encouraging investment, and lower interest payments permit the government to cut taxes.

“Still, reducing the size of government would carry larger short-term output and employment costs if a country could not offset the pain by lowering interest rates or if several countries simultaneously retrenched, the fund warned. And IMF economists rejected the theory of expansionary contractions.

“The idea that fiscal austerity triggers faster growth in the short term finds little support in the data,” they wrote in a chapter of the fund’s World Economic Outlook.

I’m sure James will look right into this and get his honest, non-partisan analysis posted tomorrow.

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