http://www.ft.com/cms/s/0/2b802ecc-8512-11de-9a64-00144feabdc0.html
By Clive Crook
Published: August 9 2009 19:30 | Last updated: August 9 2009 19:30
“Read my lips. No new taxes.” George Bush senior made that fatally memorable promise during his campaign for the White House. Later he saw that for the sake of the economy he would have to break it. When he did the right thing and went back on his word, he was vilified. It was a turning point in his presidency – his one-term presidency.
Not that Barack Obama needs reminding. He finds himself in exactly the same position. During his own run for the White House, he promised that taxes would not rise for families making less than $250,000 a year. If you are middle class, he said in his stump speech, “you will not see your taxes increased by a single dime. Not your income tax. Not your payroll tax. Not your capital gains tax. No tax”. Mr Obama knows the risk if he, too, breaks his word.
But he also knows he will have to. Higher taxes on the broad middle class would be needed even without Mr Obama’s long-term plans for healthcare reform, infrastructure spending and the rest. Factor those plans in, and the need is plain even on the administration’s own flattering arithmetic: its budget leaves an enormous long-term deficit even after the economy has returned to full employment. Make less rosy assumptions, and the hole is bigger still.
Much as Mr Obama would prefer to let the rich carry the burden alone, that will not be possible. The US tax code, contrary to popular perception, is heavily skewed towards taxing the rich. On plans already announced, it will soon be even more so. Before long, especially if you add state income taxes, the US will be a conspicuous outlier among industrial countries in how progressive its taxes are. What about taxing profits? The answer is much the same. Business taxes are already high by international standards.
So the administration’s options are limited. The fiscal gap is so big that closing it will be literally impossible without either broadening the extremely narrow base of the current income tax, or raising other taxes on the middle class, or both.
Last week Tim Geithner, the Treasury secretary, and Larry Summers, the White House economics director, were both pressed on the issue. To their great credit, both made a start on retracting Mr Obama’s pledge. As you would expect, it was all a matter of timing and uncertainty about the future. With the economy still frail, they said, this was not the moment to raise middle-class taxes. But for the future, it would be unwise to rule anything out. Also, bringing down the long-term budget deficit was an administration priority.
Well, they did the best they could. Asked for clarification, Robert Gibbs, the White House press secretary, then stamped on this tentative preamble for a new policy. He reaffirmed Mr Obama’s pledge, cancelling whatever wiggle room Messrs Geithner and Summers might have created. If that was a calculated move, rather than an improvised response, the person doing the calculating deserves to be slapped.
What should the White House be planning on taxes? The textbook answer, of course, would be comprehensive tax reform. Sadly, this looks unlikely. The problem is not working out what to do. There are plenty of good blueprints, focusing mostly on eliminating tax exemptions and deductions to broaden the income-tax base. The problem is that this would be yet another ambitious and uncontrollable project for an administration already struggling to do too much. Combining comprehensive tax reform with comprehensive healthcare reform – desirable in principle as this pairing might be – would surely overload the system.
So it will have to be patch and mend, preferably with the fundamental goal of comprehensive reform – namely, broaden the base to keep rates of tax low – kept in mind.
Ending or limiting the tax exemption for employer-provided healthcare makes a lot of sense, as I have previously argued, and in more ways than one. It can raise a lot of revenue (the exemption costs the Treasury $300bn a year.) It can keep healthcare reform deficit-neutral, as the administration has promised. And by removing an implicit subsidy, it would improve the structure of incentives within the healthcare system. Admittedly, this idea requires a double recanting, first because it is a middle-class tax increase, and second because Mr Obama denounced it during the election campaign. But moderate Democrats are willing. Mr Obama must graciously concede the point, in the spirit of principled compromise for which he is so well known.
Tweaking this exemption is the most one can expect: eliminating it looks out of the question. So this will not be enough, and the administration needs to start preparing the country for other ideas. It may not be too late to use carbon cap-and-trade to raise revenue, as the administration first hoped. The retirement age will need to rise, to help balance the books for social security. Then, beyond all this, and assuming that Congress will be incapable of comprehensive income-tax reform, the US is eventually going to need a European-style value-added tax.
Needless to say, Mr Obama needs to win another election before he can get squarely behind that idea. In the meantime, he can avoid ruling it out. He must renege in smaller, less conspicuous ways, making sure that the proceeds add up. The biggest worry is not that he breaks his word, but that he may try to keep it, until outright fiscal collapse – see California – wipes it away.
clive.crook@gmail.com
