“Nothing is so well calculated to produce a death-like torpor in the country as an extended system of taxation and a great national debt.”
William Cobbett, English pamphleteer and journalist, February 10, 1804
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It would seem that what we are doing today is reinventing a very old wheel. We have the "great national debt," compliments of a left wing spending spree of astronomical proportions. Indeed, the level of debt and borrowing and the massive increase in the money supply is, to quote economist Arthur Laffer, "potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits."
We are not on the road to economic recovery. Indeed, Bizzyblog documents that the Treasury is showing that federal tax receipts continue their steady decline, with yet another slump in June. Obama's Keynesian experiment in using massive government spending to make the economy grow is failing spectacularly. But Obama is clearly not going to forego any of his plans for ever more massive spending, making confiscatory new taxes inevitable.
As it stands today, no new taxes are in the cards for anyone who earns under $250,000 - unless of course they use tobacco, they use energy or purchase any good or service that requires energy, or they get non-union health care benefits. But even those proposed or already enacted taxes - which in the case of cap and trade will be massive - will not be enough to fund the grandiose socialist schemes of our Profligate Spender In Chief. So what will be the next to fall?
According to Roger Altman, Bill Clinton's Deputy Treasury Secretary, more taxation is inevitable and will likely come in the form of a VAT tax - driving up the cost of every good and service in our country in what amounts to highly regressive national sales tax. This from Mr. Altman writing in the WSJ:
Only five months after Inauguration Day, the focus of Washington's economic and domestic policy is already shifting. This reflects the emergence of much larger budget deficits than anyone expected.
Larger than anyone expected? Obama just borrowed and spent us into penury and the deficit surprises Altman? Apparently he was in suspended animation until yesterday.
. . . Why has the deficit outlook changed? Two main reasons: The burst of spending in recent years and the growing likelihood of a weak economic recovery.
Burst of spending in recent years? Try the burst of uncontrolled spending since January, 2009, multiplying the 2008 deficit by a factor of 4.
[A weak economic recovery] would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. Yes, the President's Council of Economic Advisors is still forecasting a traditional cyclical recovery -- i.e., real growth of 3.2% next year and 4% in 2011. But the latest data suggests that we're on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011.
A speedy recovery is highly unlikely given the financial condition of American households, whose spending represents 70% of GDP. Household net worth has fallen more than 20% since its mid-2007 peak. This drop began just when household debt reached 130% of income, a modern record. This lethal combination has forced households to lower their spending to reduce their debt. So far, however, they have just begun to pay it down. This implies subdued spending and weak national growth for some time.
In a March 27 forecast, Goldman Sachs estimated average annual deficits of $940 billion through 2019. If this proves true, deficits would remain above 4% of GDP through the next decade and the national debt would reach a whopping 83% of GDP, a level not seen since World War II. The public is restive over this threat: In a recent Wall Street Journal/NBC News poll, Americans were asked which economic issue facing the country concerned them most. Respondents chose deficit reduction over health care by a ratio of 2 to 1.
Mr. Obama and his economic advisers understand this deficit outlook and undoubtedly view it as unsustainable.
I think Mr. Altman assumes too much. Obama seems bound and determined to push ahead with his massive plans irrespective of the cost to our economy. As to what Mr. Obama "understands," I think that is very much at issue, particularly in light of his incredibly cynical push for "paygo" legislation that would exempt his massive pet projects from its provisions. I have yet to see a single thing from Obama that he understands the debt he proposes to saddle us with is "unsustainable."
. . . The poor budget outlook may impel the administration to follow up health-care legislation with an effort to fix Social Security. The shortfall in Social Security's trust funds -- which adds to the long-term deficit -- is much smaller than the companion problem in Medicare funding. Public anxiety over deficits may make this fix possible now even though it has been elusive for years. If this could be done, confidence in Washington's capacity to address its debt challenge would rise.
But even with a Social Security fix the medium-term deficit outlook will be poor. Sometime soon, perhaps in 2010, Main Street and financial markets will exert irresistible pressure to reduce the deficit.
The problem is the deficit's sheer size, which goes way beyond potential savings from cuts in discretionary spending or defense. It's entirely possible that Medicare and Social Security will already have been addressed, and thus taken off the table. In short we'll have to raise taxes.
Today, the U.S. ranks next to last among the 28 Organization for Economic Cooperation and Development nations in total federal revenue as a share of GDP. Our federal revenues represent 18% of national output, down from 20% just 10 years ago. That makes the mismatch between our spending and our revenue very large, producing the huge deficits we face.
We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama's pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes.
This challenge may be the toughest one Mr. Obama faces in his first term. Fortunately, the new president is enormously gifted. That's important, because it is no longer a matter of whether tax revenues must increase, but how.
Hold on to your wallets. There has long been talk of using a VAT tax to replace the income tax system. But what Altman is suggesting is a VAT tax on top of the income tax. And the chances of this being a bipartisan effort - other than a bare handful of nominal Republicans in the House and Senate - is zero. The left has brought us to the brink with spending on a heretofore unseen scale. They own it. I hope the left enjoys their complete control of the levers of our federal government at the moment. File this one under "give 'em enough rope and they will hang themselves."
