Tuesday, September 16, 2008

What's the real difference the choice between Obama and McCain will have on our fiscal future? Don't think it's taxes.

McCain and Obama are both campaigning across the country promising to deliver more tax cuts from today's level -- the difference between them being only the form of the cut each is promising.

But they're both politicians, and their lips are moving.

Douglas Holtz-Eakin, McCain's economic advisor, is not a politician but the former head of the Congressional Budget Office. He recently spoke about reality (quoted through Joe Klein):

Douglas Holtz-Eakin … in a forthcoming book by Fortune columnist Matt Miller, makes it clear that the next President is going to have to raise taxes.

“If you do nothing on the spending side, you’re going to have to raise taxes whether you’re a Republican, a Democrat or a Martian,” he tells Miller … and then he immediately makes it clear that the “spending side” part of the argument [cutting wasteful spending to balance the books] is nothing more than a political fig-leaf…

“It’s arithmetic.” Federal revenue today is 18.8 percent of GDP and federal spending is 20 percent. Holtz-Eakin observes that “the pressures are there” to lift spending (on entitlement programs, mostly) and taxes to 23 or 24 percent of GDP by around 2020, and to as much as 27 percent if health costs remain out of control.

… Miller does the arithmetic: that’s an annual tax hike of $550 to $700 billion, well beyond the range of any spending cuts that McCain has or might propose….

Miller concludes: So why does tax-cutting mania persist among Republicans, I asked Holtz-Eakin, the McCain adviser — given … that, as Holtz-Eakin himself explain to me, taxes soon have to go up substantially in any event?

“It’s the brand,” he said, “and you don’t dilute the brand.”

That “annual tax hike of $550 to $700 billion” compares to total income taxes collected in 2007 of $1,534 billion — you do the math on the size of the tax hike that is coming. (Although it's been done here before.)

Lest anyone think it’s particularly hypocritical on the part of Holtz-Eakin and McCain to campaign promising “tax cuts” knowing these kind of tax hikes are coming, remember that the same reality faces Obama and he’s promising a tax cut too ... Obama’s econ guy Furman is now arguing against a health care reform he himself proposed before the campaign started and McCain endorsed it ... FDR ran on a balance-the-budget promise in 1932 ... Bill Clinton ran promising a middle class tax cut in 1992 ... and so on. Everybody in a campaign puts selling their “brand” to get votes first, and being honest about the future well afterward. Don't act all shocked about it.

That said, the real difference in the future fiscal realities presented by the two candidates look to me like this:

Whatever happens, the Democrats will retain control of Congress. There is no way they are going to renew the Bush tax cuts, so the Bush cuts expire. (They are dead tax cuts walking already.) Then if ...

[] McCain wins, he reverts to the earmark-damning budget hawk he’s been during his entire career to date (when not running in an election year), pleasing his base on the right by vetoing mass Democratic spending proposals. He can’t get any spending of his own through, though, because the Democrats control Congress.

The net result is tax increases with restricted spending, and the closest thing to budget discipline seen since 1998 (also a time of divided government). The deficit shrinks, and the country will be in that much better shape to deal with the real explosion of entitlement costs when the flood tide of them starts coming in on the following president's watch, around 2017.

[] Obama wins, the tax increase from the repeal of the Bush cuts is accompanied by Democratic committee chairmen and interest groups pouring through Congress a 14-year backlog of all their favored spending that they’ve been deprived of since losing power back in 1994. We'll see the same feeding-at-the-trough that comes with monopoly political power as we saw with the Republicans after 2001, only with the emphasis on spending increases rather than tax cuts.

I don’t see from Obama’s record any sign that he’d have any interest in stopping it — nor, considering how shallow his roots are in the national party, how he could stop it if he wanted to.

The end result is the country being in worse shape to deal with the flood tide of entitlement costs when it hits, with deficits as high or higher as today but with higher taxes too -- making necessary tax increases of the future even more painful.

That’s what my crystal ball says about realistic future budget options. For all the election talk about tax proposals, the real difference to me looks to be in future spending. Take your pick.

So on the budget issue I pick McCain. Not because he is a better man or because Republicans are more fiscally responsible -- they've disproved that notion over the last eight years -- but because of institutional arrangements.

When each party has a share of power in the government each blocks the other's worst, most partisan spending -- and when actually trying to get serious things done, bipartisanship is forced as the only way to do it.

The past generation has seen just one somewhat interrupted stretch of fiscal spending responsibility. It started during the Bush I years when Bush the Elder as a Republican president had a Democratic Congress, and the two agreed to a bipartisan deal in which he agreed to a tax increase (famously to his political cost) and Congress adopted "paygo" rules that required all spending to be financed. This started a long-term gradual reduction of the deficit from its record size during the Reagan years.

After a brief interruption when the Democrats swept monopoly power in the 1992 election, restraint returned when the Republicans recaptured Congress in 1994. After that Bill Clinton's social spending initiatives shrank in size from "national health care" to "midnight basketball". After four more years of that the deficit was eliminated and a surplus arrived. (At which point the paygo rules were deep-sixed by all parties -- what politician wants to save a surplus? -- but that's another story.)

Fiscal restraint, thy name is "divided government".

If that's your issue, that's what to vote for.