Obama will feel pressure on health care from people like Anna Burger, head of the Change To Win union coalition, who told The Big Money that energy investments, health care, and stimulus spending could happen all at once. Or perhaps Ted Kennedy’s declining health will ultimately push Obama to do comprehensive health reform, even if it strains fiscal sanity. Otherwise, whether anything meaningful gets done on health and education in the first year will likely depend on whether Obama is happy with an incrementalist approach when he knows that the underlying problems are so much deeper.
Even a No. 3 priority like health care will be a challenge to push through given the reform and new spending that will be needed. The New America Foundation’s fiscal policy director, Maya MacGuineas, plainly told The Big Money: “Health care as originally envisioned is not going to happen.” James Horney of the Center on Budget and Policy Priorities says that any sensible health care reform will combine expansion of coverage with cost controls—a notoriously tough nut to crack. As for education reform, although the case may be clear, it’s hard to present it as stimulus spending when people are losing jobs and homes right now. Meanwhile, we haven’t even discussed the biggest long-term fiscal problems—Medicare and Social Security sustainability.
Obama thrived on the opportunities for teachable moments in his campaign: Will he govern in the same way—by calling for sacrifice and a new sense of responsibility from the people to make sure these two programs continue? If he does, it’ll mean a little sacrifice of hope in education and health care reform, two of the promises he made to the American people.
(STAN HONDA/AFP/Getty Images)
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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.