James Pethokoukis

Politics and policy from inside Washington

Why the GOP shouldn’t go wobbly on taxes

Jun 27, 2011 17:59 UTC

It’s up to House Speaker John Boehner now. Democrats, the media and Wall Street will be pounding him to agree to raise taxes as part of a debt ceiling deal. But now is no time for Republicans to go wobbly. Here’s why the GOP should stick to its guns until Aug. 2 – and beyond if necessary:

1. The last thing the economy needs is a tax hike. If the economy was too weak to absorb a tax hike last December – when the White House and Congress agreed to extend all the Bush tax cuts for two more years –  its health is even worse today. The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.)

 

In other words, the economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

2. Tax revenue isn’t the problem. Spending is. The recent Congressional Budget Office budget outlook was illustrative. The CBO forecast to note is its “alternative fiscal scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.”

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b)  the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.

And as bad as those numbers are, they don’t fully take into account the economic impact of all that debt. When the CBO does makes those calculations, total debt as a share of output is not 187 percent of GDP – the number you frequently see in media accounts – but rather 250 percent of GDP since economic growth would slow sharply due to debt overload. And more than likely the economy would suffer a debt crisis long before 2035 came around.

3. The key to boosting tax revenue is faster economic growth. A team of economists from the American Enterprise Institute recently fashioned a debt-reduction plan that would raise tax revenue to a long-term level of 19.9 percent of GDP. That’s pretty high when you consider there have only been three years in U.S. history that have seen a higher tax burden. Its tax plan:

To achieve this goal, the income tax system would be replaced by a progressive consumption tax, in the form of a Bradford X tax. To address environmental externalities in a more cost‐effective and market‐based manner, energy subsidies, tax credits, and regulations would be replaced by a carbon tax.

But the AEI team also notes that such a tax plan would more than likely boost growth:

Economic simulations have repeatedly indicated that replacing the income tax system with a consumption tax can boost economic growth, although the magnitude of the gains depends on the assumptions that are made and on the detailed provisions of the consumption tax. One widely cited study estimates a 6.4 percent gain in long‐run output from the adoption of an X tax.

Our plan also reduces transfer payments to the elderly, which should further increase private saving and long‐run growth. These growth effects have not been taken into account in the estimation of our plan. Accounting for them suggests that actual revenue requirements are lower than those stated above. For example, if our plan increases long‐run output by even 5 percent and if government spending does not increase in response to the expansion of output, then the actual long‐run revenue requirement will be 19.0, rather than 19.9, percent of GDP.

Revenue of 19.0 percent of GDP happens to be the same revenue requirement of Rep. Paul Ryan’s Path to Prosperity debt-reduction plan. And tax reform isn’t the only thing that can boost economic growth. Increasing high-skill immigration, implementing regulatory reform, and raisng productivity in education, government and healthcare could pump up economy-wide  GDP growth by at least a full percentage point, according to McKinsey Global Insitute.

Bottom line: Higher taxes would hurt the economy, wouldn’t solve the debt problem and aren’t really needed anyway.

 

COMMENT

“1. The last thing the economy needs is a tax hike.”

Au Contraire.

Raising taxes on the Rich & Corporate worked like a charm for both Presidents FDR and WJC. It all depends what you do with the money.

The periods of greatest economic prosperity in this country occurred when the top federal personal income tax BRACKETS were at 81%, 85%, and even 91%, while the top corporate federal income tax BRACKET was at 50%, AND after the top federal income tax brackets were raised on the Rich & Corporate.

~

“2. Tax revenue isn’t the problem. Spending is.”

Wrong.

According to the independent non-partisan Congressional Budget Office, the vast overwhelming majority of our current federal deficits and debt, as well as our medium-term projected future federal deficits and debt, are from the massive drop in federal income tax revenue as a direct result of the numerous rounds of massive tax cuts for the Rich & Corporate enacted during the previous administration.

Not even close.

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Rep. Dave Camp battles the tax hikers

Jun 27, 2011 14:25 UTC

Great WSJ interview with House Ways and Means Chairman Dave Camp,  a Michigan Republican.  A few of the better bits (but please read it all):

A short-term debt ceiling extension?

There’s talk of a short-term extension while these discussions continue. I think that’s not a good idea, because it doesn’t give you the certainty. Ideally, you’d like to get that settled, and not have it be continually a hanging-over issue.

Can we get the budget to balance without tax increases?

The House-passed budget does that, gets to primary balance. … What we want to do is not have higher revenues. Because the issue is who’s going to pay them. Their idea is always, quote unquote, “rich people over $250,000.” Half of that, as we know, is small business, which is the very sector we need to see some growth in.

What is the least damaging place to raise taxes>

I can’t think of a least damaging place. The approach they’re looking at is not just on what they call high income. They also want to sort of pluck out various provisions of the tax code and simply end them, not really with an eye to what this means to our competitiveness in a global economy. That, I think, is a very dangerous prospect.

Taxing investors and entrepreneurs and small business is no way to boost economic growth. And U.S. economic policy is so sub-optimized for growth that we could generate more revenue by expanding the pie, not raising the tax burden.  That should be the focus on government policy.

 

Where we’re at in the debt ceiling debate

Jun 24, 2011 18:42 UTC

A few thoughts:

1) Rs had every right to walk out. Dems pushing unacceptable tax hikes (including, basically, axing Bush tax cuts, along with an automatic tax trigger and a host of  tax breaks done away with) with no real entitlement reform.

2) Aug. 2 is a phony deadline because Treasury has 10x as much revenue coming in as debt payments. No reason for default. I have heard Treasury’s counterargument and I just don’t find it persuasive.

3) That being said, Rs (Boehner, McConnell) would LOVE to settle this by Aug 2. Don’t want to risk upsetting financial markets, just as they didn’t want government shutdown. They want to show governing competence to the American people.

4) Obama’s Afghanistan bug out frees up $1.4 trillion over 10 years according to CBO baseline, but those are just the sort of phony cuts Rs should not settle for. Real cuts in discretionary spending along with the Corker-McCaskill spending cap are closer to an acceptable deal.

5) Then there’s this: US economy is not growing anywhere near maximum nor is it optimized for economic growth (taxes, spending, immigration, regulation). If Uncle Sam needs more revenue, we should grow the economy faster.

A terrible day for tax hikers

Jun 23, 2011 19:34 UTC

Was it just a week or so ago when the GOP’s 30-year commitment to lower taxes was supposedly in shambles? That sure didn’t seem to be the case today:

1) Eric Cantor bolted from debt ceiling talks with VP Joe Biden, saying the tax issue was an obstacle and that Obama and Boehner needed to hash things out directly. Now three sources tell me that Cantor and Boehner are against any net tax revenue increases, whether from higher tax rates or the elimination of tax subsidies.

2) Mitt Romney signs the tax pledge of Americans for Tax Reform, as he did when he ran 2008.

Of course, the weird thing is that Romney just declined to sign a pro-life pledge. But in any event, it is good to see him take a hard line against taxes and for Schumpeterian, pro-growth economics.

3) At a House Budget hearing today, the director of the Congressional Budget Office said the following: ”Higher marginal tax rates do reduce economic activity.”  This is  a point yesterday’s CBO report made repeatedly.

Debt ceiling talk hit impasse! Markets freak! Investors panic!

Jun 23, 2011 18:22 UTC

First, a summary of today’s galaxy-shattering news from my beloved colleagues at REUTERS:

U.S. budget talks hit an impasse on Thursday after a both Republicans walked out, throwing doubt on Washington’s ability to reach a deal that would allow America to continue borrowing and avoid a debt default. Representative Eric Cantor, the No. 2 Republican in the House of Representatives, said participants had identified trillions of dollars in potential spending cuts but were deadlocked over tax increases that Democrats want. ”Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue,” he said in a statement. Republican Senator Jon Kyl also left the talks, an aide said. House Speaker John Boehner said Democrats must abandon any tax increases for negotiations to continue. ”These conversations could continue if they take the tax hikes out of the conversation,” Boehner said. He added tax increases could never pass the Republican-controlled House in any event.

TPM adds this color:

A Senior Democratic aide suggested to TPM earlier that Cantor “threw Boehner under the bus” by calling on him to leap into talks, keeping his own hands clean of any tax increases unpopular with the GOP base. Pushing back on the notion, a senior GOP aide told TPM in an e-mail that the “White House has secretly been negotiating with Senior Republicans behind the Democrat Leaders backs, so it is understandable they don’t understand the dynamic at play.”

Will Republicans crack and agree to the elimination of some tax breaks in order to raise revenue? I sure hope not. There is certainly no economic reason to raise taxes. The U.S. economy is not optimized for growth. If we want more revenue, growth the pie. Or cut more spending. Or, preferably, both.  And certainly there is no way Rs should accept higher taxes for anything less than structural healthcare reform that moves the system to a form that is more patient-centric and market friendly.

 

First they came for the flash traders …

May 12, 2011 14:31 UTC

Democrats want to raise taxes on oil companies. They want to slap fees on high-frequency trading firms. And they want to raise taxes by$2 trillion over the next 10 years, including a 3 percent surcharge of millionaires.  All of which will solve nothing since we either need to radically restructure entitlements (such as through the Paul Ryan approach) or hit the middle class with broad new taxes (the true “progressive” approach which they will not fess up to.) For now, though, liberals are focusing on the easy targets for higher taxes: Big Oil, Wall Street and The Rich. But that is not where they will stop …

COMMENT

Really, using the start of a phrase that stated “First they went after the Communists” then “Trade Unions” and “Jews” (left-wing groups) as a statement about the evils of the Nazis to support a right wing agenda is not just classless, it belittles the evil that was Nazi Germany.

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What goes down, must come up: GE’s latest tax bill

Apr 21, 2011 14:59 UTC

Tell me what happened, Reuters:

The company, which has come under fire over the past month for reports of an unusually low 2010 U.S. tax bill, pointed out that its consolidated first-quarter tax rate was 53 percent as a result of the NBC Universal sale.

And as BBrand X noted:

GE’s consolidated tax rate was 37 percentage points higher than a year earlier, reflecting the company’s projection that the rate would rise significantly after the NBC sale.

The company’s taxes have been in the public spotlight since the New York Times reported March 24 that GE had a tax bill of zero in 2010, an assertion the company called misleading on its GE Reports website. The criticism prompted a hoax press release last week.

GE has rebuffed the tax bill claim specifically and said the company received no rebate, refund or payment from the government on its 2010 taxes.

Indeed, GE predicted this:

GE’s tax rate has been lower in recent years due to financial crisis losses at GE Capital. From 2008-2010, GE Capital suffered nearly $32 billion in losses as a result of the financial crisis. That’s not a “tax avoidance strategy.” Absent such unusual losses, GE’s overall effective tax rate would have been 15 percent over the past several years, which is comparable to the average for other multinational corporations. Our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.

And the company has this cold:

The United States is virtually the only major industrialized country that taxes overseas earnings of companies. GE and many other companies — and, for that matter, Congress and administrations over many decades — have supported deferral of tax on foreign earnings for all companies. Doing so makes U.S. companies more competitive globally. This is not a “shelter,” it is good policy.

The U.S. shouldn’t even be taxing overseas income. Better to simplify the system, tax territorially and lower the tax rate to at least 15 percent  And don’t forget that even when you factor in various tax breaks and loopholes, the U.S. STILL has the highest average effective corporate tax rate among advanced economies.

The politics of S&P’s U.S. debt warning

Apr 18, 2011 17:16 UTC

OK, so Standard & Poor’s has downgraded the outlook for the U.S. to negative, saying it believes there’s a risk policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

“Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” S&P said in a release.

Some thoughts here:

1) Did the rather incoherent, hodgepodge nature of Obama’s budget speech last week play a role in this? As I wrote:

Obama’s much-hyped new budget plan is actually neither new nor a budget nor a plan. To the extent that it’s even a “framework” — to grant the White House its preferred descriptor — it’s one whose ideas and goals are precariously fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity. Then again, the core purpose isn’t budgetary balance but political persuasion.

And then there was the president’s rhetoric. Recall how Paul Ryan blasted Obama:  ”Rather than building bridges, he is poisoning the well.”  Here is how S&P puts it:

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

2) The agency’s shocking note doesn’t mention the debt ceiling debate. But both Rs and Ds may try to use it to their advantage. Rs can argue it means the vote to raise the limit must include real budget reforms and cuts. Ds can say the U.S. fiscal position is precarious enough that this is no time to mess with the debt ceiling. Of course, that line would run counter to the Dem meme that the debt situation is important but not urgent.

3) Financial pros say that even should S&P take the next step and actually downgrade America’s AAA status — the note said there was at least a 1-in-3 chance of that happening within two years — it would likely have little economic impact. As the WSJ notes:

Meanwhile, Dan Greenhaus of Miller Tabak + Co. notes that even if the U.S. lost its premier status, that doesn’t mean the end of the world. “The experience of Canada and Japan show that the loss of a AAA rating is not a death blow,” he writes in a note to clients. “If governmental finances can be adjusted (in the case of Canada) or domestic participants continue to find the debt attractive (in the case of Japan), higher yields on a sustained basis are not assured.”

But that seems a bit too pat to me. Market and consumer psychology is a precarious thing. It might really depend on what else was happening in the world at that time.

4) I hope Republicans don’t let S&P use this warning to bully them into accepting tax increases to get a quick Grand Compromise budget deal. As I wrote a bit earlier today:

Here’s the problem: Any attempt to cut deficits and debt faster than Paul Ryan’s “Path to Prosperity“  would almost certainly have to involve immediate benefit cuts to Medicare and Social Security recipients or higher taxes. And to the extent that S&P’s call will be interpreted as an exhortation to cut now, those Democrats and Republicans (such as those in the U.S. Senate’s Gang of Six) who insist higher taxes must be part of the fiscal fix will have their hand strengthened. But what S&P is really saying is Washington must decide on a plan. Ryan has a plan, the Obama White House does not.

5) Washington types keep telling me that Americans really don’t care about the debt issue. But I think this warning — not to mention an actual loss of the AAA rating — is yet another data point that will sink into our collective head — right along with a trillion-dollar deficit, the EU debt crisis and our financial meltdown which shows too much debt can cause wealth to disappear in a flash.

COMMENT

Don’t think even for a moment this doesn’t help anyone but Palin. This is like manna from heaven for her. It’s as if God himself decided that she should have a banner week.

Everything seems to be falling into place for her now.

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Obama’s $2 trillion stealth tax hike

Apr 18, 2011 02:57 UTC

Talk about fuzzy math. President Obama claims higher taxes will account for a mere third — $1 trillion — of his proposed $3 trillion debt reduction over 12 years, not counting less interest expense. Wrong. The actual number is probably around 50 percent of $4 trillion in savings — some $2 trillion — and could be closer to 60 percent. (More details below.) Instead of offering a template for a Grand Compromise, Obama seems to have created a Grand Obfuscation.

This is just one example among many that shows how Obama’s much-hyped new budget plan is actually neither new nor a budget nor a plan. To the extent that it’s even a “framework” — to grant the White House its preferred descriptor — it’s one whose ideas and goals are precariously fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity. Then again, the core purpose isn’t budgetary balance but political persuasion.

The Obama White House naturally wants the media to favorably compare his outline to House Budget Chairman Paul Ryan’s 73-page  “Path to Prosperity” which is highly detailed and has been scored accurate by the Congressional Budget Office. It brings the budget into balance and eliminates the national debt by cutting spending — not raising taxes.

And how does Obama’s  “Framework for Shared Prosperity and Shared Fiscal Responsibility compare?

1) Obama’s Framework is a speech, along with a roughly 15-page fact sheet that is unlikely ever to get placed under the CBO microscope. It’s tough to score generalities such as the president’s claim the plan would put “deficits on a declining path toward close to 2.0% of GDP toward the end of the decade.” “Close to”? “Toward the end”?

2) The Obama Framework also fails to give a clear trajectory of where the debt-to-GDP ratio is heading, other than to call for a trigger that would boost taxes or cut spending in 2014 if the ratio doesn’t appear to be bending lower.

3) Other oddities abound. The plan has a 12-year time frame rather than the customary ten. It doesn’t indicate  what baseline it uses to make claims that it cuts debt by $4 trillion, if you include interest expense. Nor does it spell out what economic projections are being plugged in. Obama’s 2012 budget released in February was more bullish than the CBO’s, which Ryan uses.

4) Also unlike the Ryan Path, the Obama Framework doesn’t show how his plan affects debt and deficits over the coming decades. If it did, Obama would have to reveal that he can’t a) keep government spending above historical levels and b) balance the budget and reduce debt long term without c) jacking middle class taxes through the roof.

The Obama Framework is so vague and fuzzy that doing a true apples-to-apples comparison between the Ryan Path and the Obama Framework comparison is almost impossible. (Best guess: Ryan cuts $3 trillion more than Obama over a dozen years.) This could be intentional.

The tax issue mentioned earlier provides a perfect illustration. Toward the end of his speech last week, Obama said the following:

This is my approach to reduce the deficit by $4 trillion over the next twelve years. It’s an approach that achieves about $2 trillion in spending cuts across the budget. It will lower our interest payments on the debt by $1 trillion. It calls for tax reform to cut about $1 trillion in spending from the tax code. And it achieves these goals while protecting the middle class, our commitment to seniors, and our investments in the future.

But earlier in the speech, Obama also said this:

In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.

If you’re keeping score, what Obama is actually proposing is $1 trillion in new taxes on wealthier Americans (and small businesses) and $1 trillion in higher tax revenues by reducing tax breaks and subsidies for a total of $2 trillion in new taxes over 12 years. That means total debt reduction, not counting interest, would be $4 trillion, 50 percent of which would come from higher taxes. The econ team at Goldman Sachs ran a similar analysis and found that 56 percent of Obama savings over ten years could come from higher tax revenue.

In this way, Obama relies far more on taxes than the two-parts spending/one-part taxes formula of the Obama-Bowles-Simpson debt panel that is supposedly his model. As Obama said, “It’s an approach that borrows from the recommendations of the bipartisan Fiscal Commission I appointed last year.” Not really.

Now none of this is easy to discern from Obama’s speech nor from the accompanying fact sheet. Neither indicates which budget baseline Obama is using. If he is, for instance, using the standard CBO baseline which assumes all the Bush tax cuts expire, Obama’s budget plan might actually get close to 60 percent of its debt reduction from taxes, especially if he also used the CBO’s gloomier GDP forecast. And if his mid-decade tax “trigger” should get pulled …

Of course, the framework that really interests the White House is a political one. They want to set the terms of the 2012 presidential election debate. And with this budget plan they have, though surely not in the way they intended. America’s debt problem is one of too much spending, not too little revenue. By offering a tax-heavy fiscal fix that keeps Big Government firmly in place, Obama offers Americans a clear choice of economic futures, his or Paul Ryan’s.

COMMENT

Democrats are so darn lazy. If they would just look up some FACTS instead of repeating lies otherwise known as Democrat talking points, they might realize that the top 10% of tax payers already paid 71% of the income tax though they only made 43% of the income… nah they’re not paying their “fair share” as Obama likes to blather…

The top 10% only make $3.3 trillion in AGI so for every 1% increase in their taxes you only get $33 billion… so raising rates back to the Clinton rates only nets about $100 billion a year. Of course that ignores the fact that many if not all of the top 10% would adjust their affairs to avoid most or all of the rate increase but just for argument, let’s use the $33 Billion figure.

Now a question for you Democrat/Socialists of “tax the rich” school. What is the annual interest on Obama’s $16 trillion deficit? OK I’ll tell you since I am sure you have no clue,it’s $400 Billion. Obama’s annual deficit is $1.2 Trillion.

So let’s do a little math, going back to the Clinton rates covers only 25% of Obama’s interest expense… so for “tax the rich to work, we really need an additional $1.2 trillion a year to cover the Democrat spending and the debt service. So he really has to raise rates by about 36% on those evil rich people in the top 10%.

You see the magic of Obama and the Socialist/Communists “Tax the Rich” plans is that they don’t work. Honesty is not one of Obama’s strong suits. You can now see how ridiculous any argument that relies on “taxing the rich” is. Spending has to be cut by well over a trillion dollars a year.

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Why Obama’s tax pledge is bogus

Apr 12, 2011 01:42 UTC

Who does Team Obama think it’s fooling? Budget experts are already scoffing at the idea that the White House can somehow deal with America’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, that’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, Ryan’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 – households earning more than $250,000 a year, according to the Tax Policy Center.  (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 won’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 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.)

You almost assuredly won’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.

COMMENT

I saw Ryan on Meet the Press yesterday (4/10).
Ryan said that Medicare will be insolvent in nine years
at the rate that it is on now. This was one of the examples he used to explain why tax and spend won’t get us out of our grief. Reform must be done.
Ryan was using the GAO figures.

Well, here’s a place where there needs to be some discussion. Just letting the people above 55 do things
the old way, and then all the younger ones pretty much
go into privatization isn’t a good solution.

This competition that everyone believes will lower the price of health care (the invoices that doctor’s bill)
is not going to materialize.

For instance, no one in our state of WI can have an x-ray without one of not-too-many specially certified radiologist hired to look at the film. Several years ago, the guy that did mine charged me $500 for five minutes work. The hourly rate was $6,000 per hour. It isn’t that price now.

My husband’s MRI cost well over $4,000 and the
reading bill for that was $1,000 (for probably 5 minutes work.)

It is state law that requires this charge. It is medical schools that restrict the number of radiologists in the first place.

Economics…supply and demand…this is a gold mine for medical facilities.

I’m thinking that –just as power and light companies
are regulated—the medical industry has to be as well.
Medical industries are somewhat of a monopoly and they shouldn’t be allowed to gouge the American public beyond what they can afford.

Privatizing ANY medical is redundant. Sure the costs
are thrown off the Federal Government’s back…some
onto the state’s back…but privatizing is avoiding the
one cost that’s even worse than the deficit by
telling seniors-to-be that “You’re on your own–Good luck.”

The same goes for this horrible idea of privatizing social security. What a field day for people like
Romney’s old hedge fund company, Bain!

You want to have a class system in America…
well…you just fix the federal money ills with
unregulated privatizing. And if you’re gonna
regulate, then regulate fair and square across the board, none of this exception stuff creating loopholes and (oh)– You know the usual ifs, and, and buts,
for the Senator Frists out there.

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