Thursday, January 28, 2010

Obama's impossible-to-square promises on taxes and the deficit. 

In the State of the Union address last night Obama turned populist on the budget, spending a lot of time promising to deliver more spending programs and tax cuts for the middle class and businesses ... while slashing the budget deficit to a sustainable level ... and not increasing taxes on anybody who isn't among "the rich" making over $200,000.

Of course it's obvious why he did, and why he'll keep on making promises this way until the November election, after the Massachusetts calamity. And it's not really any kind of "turn" in electoral tactics for him -- he did the same thing during his 2008 campaign (promising to fund universal health care with a tax cut).

But how realistic -- dare we say "honest"? -- is this combination of promises? Let's see...

Recent Tax Policy Center analysis shows how much taxes will have to increase, under different policy scenarios, just to get the deficit down to a sustainable 2% of GDP post-2015, from today's starting point (not counting the flotilla of new tax breaks and spending programs he just promised)...
The Congressional Budget Office projects an average deficit over the 2015-2019 period of ... 6 percent of GDP [if] Congress follows current policy and makes both the Bush tax cuts and AMT patches permanent as the president has proposed.
... that 6% clearly being unsustainable, since the economy when doing well grows an average of only 3% a year.

What if, keeping Obama's promise, the deficit is reduced to 2% of GDP using tax hikes that hit only persons making over $200,000?
Their rates would go up ... more than 150 percent under current policy. In other words, the top tax rate would return to the bad old days of 90 percent. Even if we go for the Administration’s more modest goals — start with current policy and aim for deficits averaging 3 percent of GDP — those top tax rates would have to more than double, taking the top rate over 75 percent.

And our estimates ignore behavioral response ... cranking the top rate up to 90 percent would lead to a massive reduction in taxable income and hence a lot less additional revenue than we found.
Ouch! But even so, Democrats prefer tax hikes to spending program cuts.

So what if to keep them happy Obama breaks his "tax" promise and increases everybody's taxes from current levels?
rates would have to jump nearly 50 percent. In other words, the 10 percent bracket would become nearly 15 percent and the 35 percent top rate would go to 52 percent.
Ugh ... a full 50% across-the-board income tax increase? I think even the left side of the left would gag on that.

(I'll mention for the record, "what if the Bush tax cuts are not renewed, and there are no more AMT fixes" -- though in reality that would be part of the second option above, a "tax increase on everybody from current policy". It requires another 15% tax increase for everyone on top, which again totals to the revenue-generating equivalent of the 50% across-the-board increase from current policy, only with the impact on who pays how much shifted around somewhat.)

Hey, what if we got rid of "tax breaks for the rich". Heck, get rid of tax breaks for everybody...
eliminating all itemized deductions ... wouldn’t yield enough revenue... Besides, wiping out popular deductions for home mortgage interest, state and local taxes, charitable contributions, and other expenses would never fly. We even looked at capping the tax-reducing value of itemized deductions to 15 percent, but that wouldn’t raise nearly enough under either current law or current policy. (Last year, Obama proposed a more lenient 28 percent cap.)
Conclusion: We've finally reached the point where no imaginable income tax increase(!) can do the job by itself.
Our simple exercise yields two important messages: We can’t balance the budget with income tax increases alone. We also have to cut spending and perhaps look for another revenue source as well. VAT, anyone?
Although nobody's discussing those options either. Instead, the politicians are still competing for votes by ladling out promises of more spending and more tax cuts for everybody except the over-$200k crowd.

Troubling thought: Has the budget deficit finally mathematically reached the "out of control spiral" point?

It's simple arithmetic that Obama can't come even anywhere close to meeting both his promises of (1) reducing annual deficits to sustainable deficits and (2) not increasing taxes on anybody but the over $200k-ers. By hard necessity, one's gotta go overboard -- probably both will.

Well ... his promises today may help get his fellow Democrats through the election this November, but they are still short-sighted even regarding his own self-interest (not to mention the country's).

In 2012 his own re-election campaign will be here, and he is going to be way, way off from delivering his promise on either the deficit or on taxes, if not both.

The problems he just had getting his health plan past the voters that resulted from his, "I'll negotiate it all on C-SPAN! No backroom deals!" broken promises may prove to be as nothing compared to the problems he'll have getting his own self past the voters then, in light of his "I'll slash the deficit and not raise taxes!" broken promises.