The Obama tax trap

Can the trap being laid be avoided?

“‘Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits step up. Because I’m calling their bluff.”

That was President Barack Obama, the heretofore unknown deficit hawk, all but announcing the other day the tax trap that he’s been laying for Republicans. From what we hear about intra-GOP debates, more than a few will be happy to walk right into it.

You don’t need a Mensa IQ to figure this one out. Mr. Obama’s plan has been to increase spending to new, and what he hopes will be permanent, heights. Then as the public and financial markets begin to fret about deficits and debt, he’ll claim that the debt is “unsustainable” and that the only “responsible” policy is to raise taxes.

White House officials even talk privately about the galvanizing political benefit of a bond market crisis, which would force panicked Members of Congress to accept a big new value-added tax. The President’s two looming tax reports—one from his deficit commission and the other from Paul Volcker‘s economic advisory group—are intended to propose a VAT and other tax options. Whatever their initial reception, the proposals will be there to be pulled from the shelf when the political moment is right.

Voila, Mr. Obama will have established a new spend-and-tax policy architecture that has the feds taking from 25% to 30% of GDP, up from the roughly 21% modern average.

The rules to help this along have been put in place by Pelosi and company.

Under Congress’s perverse budget rules, extending those tax cuts will “cost” the Treasury revenue, even though extending those tax rates would only prevent a tax increase.

And because Congress still uses static revenue scoring—meaning no change in economic behavior from tax changes—the Joint Tax Committee thinks it will raise nearly $1 trillion over 10 years from the higher tax rates on incomes, dividends and capital gains. That’s highly improbable. After those tax rates were cut in 2003, total federal tax revenue increased by 44%, or $743 billion, from 2003-2007.

In other words, Democrats have rigged the rules so that merely stopping a tax increase will be scored to increase the deficit. These are the same Democrats who haven’t “paid for” trillions of spending in the last four years, but watch them soon denounce Republicans as fiscally irresponsible merely for trying to stop a tax increase. Orwell would love modern Washington.

If Republicans go along with this perverse pay-as-you-go logic, they will play into Mr. Obama’s hands. He’ll gladly offer to raise taxes on the wealthy in order to “pay for” extending the lower Bush rates on the middle class. Never mind that the tax increases on capital gains, dividends and income tax rates will do the most economic harm.

Will Republicans, including those running here in the 8th heed this advice to avoid the trap?

Republicans need to break out of their rhetorical preoccupation with debt and deficits, focusing their political aim instead on spending and above all on reviving economic growth. They should hold the line against all tax increases and begin to consider a menu of tax cuts to make the U.S. more competitive, especially if the economy continues to underperform.

Mr. Obama’s strategy of spending our way to prosperity clearly hasn’t worked, as the voters are coming to understand. But if the GOP policy response is merely to bemoan deficits, they will soon find themselves back at their historic stand as tax collectors for the welfare state. To avoid Mr. Obama’s tax trap, Republicans also need a growth agenda. (Source: WSJ)

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