Will Obama Raise Taxes on the Middle Class?
Liz | 04/09 at 06:42 PM
Remember when boys were boys, men were men and President Obama wasn’t going to raise taxes on the middle class? Paul Volcker, former Federal Reserve Chair and the administration’s favorite launcher of unpopular financial balloons, plucked the value-added tax (VAT) out of Nancy Pelosi’s fantasy world this week and plopped it right down on the nation’s kitchen table. For most Americans, this far-reaching European staple has all the appeal of week-old bratwurst. But even tainted meat appeals to those starving for financial salvation.
Simply put, the Obama administration has absolutely no clue how to balance the nation’s books. Since we’ve passed the expiration date on the “we inherited the deficits” lament, the Obama team is under the gun to provide what Fed Chair Ben Bernanke called for in a speech this week – a plan to cut our long-term “unsustainable” deficits.
The president is on slippery ground here. We all know that our giant entitlements programs are the root cause of our budget chasms – and that Obamacare will become yet another giant gusher. So far, the president has taken the bold step of … passing the buck – to the Deficit Reduction Commission.
What can be done? One approach is higher taxes. Thus, we now have le parfum of a VAT hovering over the land. This is a cumbersome approach that, if implemented, would require an entirely new tax authority, since today we have no federal retail consumption tax. In 1992 the CBO estimated that it would cost the feds and companies $5 to $10 billion annually simply to comply with the reporting requirements; ramp that up for the intervening 18 years and you’re talking real money – money our business sector would be better off spending on updated plants and equipment. Worse, the VAT is a regressive tax, meaning that its impact is felt more keenly on lower income – note: and middle class – Americans.
The VAT was first introduced in France in 1954 and spread like a virus throughout the European community. Because it is largely hidden from view (the consumer does not see the total value of the collected tax), politicians in Europe have easily pushed the levels higher over time to fund safety-net spending. The Center for Fiscal Accountability quotes a 1980s finding by the Chamber of Commerce “that government spending grew 45% faster in nations that had adopted a VAT than in those that had not.” Consider it a stealth tax. As we watch the Euro sink like a stone, and anticipate the possible dissolution of the EU, we should really think twice before emulating Europe’s financial model.
Another approach to solving our unsustainable deficits, championed by The New York Times and others, is still more government spending. To rev up hiring, editors at the Times encourage extending jobless benefits. There’s even talk of another WPA – like the one created during the 1930s. It’s like New York Gov. Patterson’s solutions to our state’s huge debts and budget gap – borrow more money!
Thankfully, the nation’s excitement about higher government spending has been defused by the pitiful results of the Stimulus Bill. Less than 40% of the original $787 billion has been spent, even though a good portion of the total was in the form of tax relief, which should be easily accomplished.
This is a disappointment. Many Americans imagined that those funds would bring new airports or nifty new technologies aimed at making our lives and businesses more efficient. With envy we read of China’s success in putting $500 billion quickly to work on public infrastructure projects and in support of businesses – and their coups in technologies like high-speed trains. Ironically, they are now offering to bring their extraordinary fast-rail capability to the U.S.; so it’s not just cheap shoes anymore.
I credit the government for having pushed through the Stimulus, as sloppy as it has been, and the Fed for having undertaken a mammoth injection of liquidity into the financial system. That, however, cannot be the way forward.
Floyd Norris, writing in The New York Times, questions why there are so many pessimists in the crowd today, even as the stock market celebrates a recovery. He likens this cycle to those that have come before, pointing out that employment is always a lagging indicator and that increased jobs will surely follow higher economic activity.
He is right. We are enjoying a cyclical upturn and it is likely to continue. However, in past cycles we rarely faced the kind of federal and state budget problems that burden us today. These are not the imagined demons of the Right – these are financial promises made to Americans that will limit vital national programs such as defense. Moreover, as our manufacturing base continues to shrink, we worry where our growth will come from.
The popular gloom also stems from a belief that as the government takes over more of our economic activity – autos, health care, etc. – those sectors will become less efficient. In the latest polls, 59% of Americans think the government is doing too much. It’s not because we think de facto the government should not be in these arenas; it’s because we’re pretty sure they will do a terrible job.
This brings me to the solution that seems to have escaped our national leaders – both political and financial, but that is of necessity guiding our state officials. That is the concept of cutting outlays. Governors like Chris Christie in New Jersey and Mitch Daniels in Indiana are finding ways of cutting expenses. It turns out that – guess what – even hallowed school budgets have fluff.
What does a good CEO do when times are tough? He orders his division heads to cut costs. Why doesn’t our government do that? While surfing the Recovery.gov website (recommended reading for insomniacs), I came across an allocation of $142 million to the Railroad Retirement Board. I had never heard of that federal agency, which turns out to have been created in the 1930s to handle retirement and disability benefits for railroad workers. Today it administers programs for well under one million beneficiaries, so by Beltway standards it is a peanut. The agency’s budget request for the current fiscal year is $110 million, to employ a full-time staff of 889. My question is: Why should this anachronism exist at all? Why isn’t it folded into social security and treated like other retiree programs? I seriously don’t know, but I can’t imagine that a large scalpel applied to our mammoth bureaucracy wouldn’t accomplish wonders. Moreover, I am convinced that if you started peeling the onion on where our money actually goes, you would indeed start to cry.