Never has the prose of governing been so distant from a campaign’s poetry. Barack Obama begins his transition and will take office under ruinous economic conditions—consumers aren’t buying, layoffs have begun en masse, and a creaky federal government has become the national lender of first resort. Obama’s overall campaign narrative, on the other hand, was made even more alluring by the crisis, embracing a positive role for government generally. Specifically, it was a liberal’s dream—a blizzard of new money and programs. This is hope that’s hard to deliver. And health and education reform seem to be most at risk.
Obama’s signature tax proposal plan, which rose to a “Read my lips” level of insistence, lards on the goodies. There’s the “Making Work Pay” for all but the highest income earners tax credit, plus eight other different kinds of credits for everything and everyone, including the college-bound, seniors, health care, child care, and makers and users of energy-efficient products. The Tax Policy Center estimates that this would add $3.6 trillion to the national debt by 2018, more than double the increase that would otherwise be expected.
That’s just the tax side. Here are some other big-ticket Obama items (a fuller list is at Obama’s new transition site, change.gov):
- $150 billion over 10 years for the clean-energy economy
- A new $50 billion jobs and investment program, in addition to the first economic plan, now tagged at $115 billion
- Expanded Medicaid and a new public health care plan
- $10 billion a year for kids under age 5
- Policies like greater fuel-efficiency mandates that might have an economic cost
Consider what we’ve already got: a $700 billion bailout plus a government leveraged on overseas swaps and domestic lending. Some of this may be recouped, but Obama is unlikely to parse that point for an angry public. Plus, there’s a massive hole next year—a 2009 budget deficit of $1 trillion before additional fiscal stimulus or any of the Obama platform, according to the Committee for a Responsible Federal Budget. It looks as though some of those expensive promises will have to go. Which ones?
We can get a few hints from the public record and by practicing some amateur Obama Kremlinology. In a Halloween interview with CNN’s Wolf Blitzer, Obama named financial stability and energy independence as his No. 1 and No. 2 priorities. Plus the tax cut “may be part of my priority No. 1, because I think that’s going to be part of stabilizing the economy as a whole.” One Obama adviser pointed The Big Money to a September Washington Post op-ed arguing that “the case for fiscal stimulus—policy actions that increase short-term deficits—is stronger than at any time in my professional lifetime.” The author was leading Treasury secretary candidate Larry Summers. Meanwhile, Nancy Pelosi is starting to talk about two stimulus packages, including a “permanent tax cut,” while new Chief of Staff Rahm Emanuel mentioned tax reform as one of four kinds of reforms the Democratic Party should undertake. These mimic Obama’s priority No. 4 from the Blitzer interview: “tax cuts for the middle class as part of a broader tax reform effort.”
But spending has to be kept low enough to keep Chinese bondholders and deficit-hating Blue Dog Democrats happy, and that leaves little money (or available political capital) for some of Obama’s broader social reforms. Going line by line through the federal budget won’t cut it. And Obama pegged health care and education as being priorities No. 3 and 5 in the Blitzer interview.
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TANSTAAFL
Obama inherits a government where Bush and Congress were already spending like Social Democrats (but not yet taxing like them). Unfortunately, because of the rapid growth in spending over the last 10 years, we'd need to let Bush's tax cuts expire AND exit Iraq just to come close to balancing the budget in a good year for the economy (even before Obama spends a dime).
Of course, Obama wants to spend tons more- permanently. This will not be possible without either a) creating inflation, a debt crisis and Dollar devaluation or b) raising taxes on everyone.
While the rhetoric is that the rich have gotten tax cuts, the trend of the last 22 years is that the rich wage earners pay more and the poor pay less. Since the Reagan tax reforms in 1986, the top tax bracket has risen from 28% to 31% to 35% (peaking along the way at 39% under Clinton), while the bottom tax bracket has fallen from 15% (under Reagan, Bush1 and Clinton) to 10% (under Bush2) and for many tax payers is zero or negative due to the expansion of the EITC. Lower income workers pay less than they ever have, while high wage earners pay 25% higher rates than under Reagan. However, it is true that rich tycoons (like Buffet and Obama's hedge fund friends) that rely on capital gains rather than wages have gotten a huge tax cut (from 28% under Reagan to 20% under Clinton to 15% under Bush). This probably helped inflate the dot com and housing bubbles and drive the massive increase in income inequality during the Clinton/Bush era. In addition, these tycoons love big spreads between capital gains taxes and income taxes as they can make charitable donations of shares that they've never paid a dime of taxes on and get high income tax deductions in return. These donations do not actually get distributed as charity but instead sit in foundations, which can then employ the tycoons friends and family and buy political influence. It is a pretty sweet set-up (but I digress).
We know taxes need to rise sharply. Who will be taxed?
Most Americans (and certainly young voters) are not familiar with the type of Social Democratic government that Obama wants to move the US towards. Europe is a good guide to what our tax policy may become. European Social Democracy is not and cannot be funded by taxing the rich alone. If that were possible then every country in Europe would be funding itself that way and Thatcher would never have come to power in Britain.
In fact, many European countries have top income tax rates that are already less than in the US (when you add US state and Federal taxes together). What the Europeans do is take fairly high tax rates and apply them down to fairly low income levels. For instance, in the UK the 40% bracket starts at less than the equivalent of $60,000 in income and there are zero or only very small deductions for mortgage interest, charitable contributions and personal exemptions.
In addition to very high income taxes on middle income earners, your typical person in the UK was paying nearly $10 a gallon for gasoline (at the peak in oil prices), $10 for a pack of cigarettes, $6 for a beer at a run-down pub and a 17.5% sales tax (VAT) on each and every purchase.
Yes, their government benefits are slightly nicer than ours (though the biggest difference is their "free" healthcare), but the truth is that everyone pays for those benefits, in a much more regressive way than in the US. The only way to fund big programs is to go after the big pool of tax money (the middle class). Don't worry, though- according to Summers and Furman (two Obama econ advisors), taxes that look regressive (like energy taxes and VAT) really aren't regressive if they're levied to fund broad programs. Why, that $10 a gallon gas is necessary to pay for the surgery you're on the one year waiting list for. That is the reality of progressive politics.
The really bad news is that the UK last year ran about as big a deficit as the US despite all of those high taxes. The only country that seems to be doing a good job of funding Social Democratic benefits responsibly is Canada, though they have some hard to replicate advantages (huge natural resource production/export relative to population). I also note that Canada's income taxes and corporate taxes (in some provinces) are lower than in the US and you can buy the equivalent of a Canadian green card for less than $400,000. When you renounce your US citizenship you need to pay capital gains taxes on all of your appreciated assets, but that isn't a problem for most people these days!
Anyway, if you voted for Obama because his is "not Bush", you'll be happy. If you voted for him expecting government freebies, you'll be disappointed. There is no such thing as a free lunch. Look to Europe if you want a good idea of what is in store. Higher taxes for EVERYBODY.