With the current all-encompassing economic crisis continuing to unfold and the situation in Iraq holding steady, its easy to fixate on domestic issues. But taking a step back from the economic mess that is currently sucking up all the political and media oxygen, it is important to remain focused on Al Qaeda’s desire to destroy us and the previous well timed opportunism of their attacks.

Consider-

The September 11 attacks took place during our last recession, as the tech bubble was collapsing. I don’t doubt that Al-Qaeda would have attacked us at some point regardless, but I do believe that the timing of our economic difficulties influenced the timing of their attack. And I hate to say it, but the psychological damage from the 9-11 attacks was probably at least somewhat successful in exacerbating the economic downturn.

The 3-11 attacks in Spain were also astutely timed to maximize Al Qaeda’s goal of knocking the Aznar government out of power and ending the Spanish Government’s support of operations in Iraq.

The bombing of the Al-Askari(Golden Dome)Mosque in Iraq in February 2006 was a tragically successful Al Qaeda operation that unleashed massive sectarian violence and effectively negated whatever progress had been made with the free elections that had taken place in Iraq and the formation of an independent government.

Say what you want about Al Qaeda, but they are not stupid. They know how to time their attacks to do maximum political damage. With our economic struggles now far worse than they were in 2000, imagine the real and psychological damage that an Al Qaeda “spectacular” attack would do to our economy. There are two scenarios that I fear most- a WMD attack on a major American city, killing tens, if not hundreds of thousands, or equally bad on a more targeted level, assassinating President Obama with the hopes of destroying national moral and forever poisoning race relations. Obviously either of those scenarios would be horrific in even a robust economy, but can you imagine how much worse the current perilous economic situation would become if either of those events took place?

I actually have relatively high confidence in the FBI, Homeland Security and the Secret Service, but I have a real concern that in this time of Presidential transition and with the extensive efforts underway to deal with overwhelming economic problems, there could be a lack of focus on dealing with Al Qaeda- at the very time it would be most attractive for them to strike us. Hopefully my fears are unfounded.

In fiscal year 2008, the Federal Budget Deficit increased to $455 Billion, which helped drive the total US National Debt to $10.6 Trillion (as of 11/16). The unfolding financial bailout will potentially add another $7.5 Trillionon that (including the likely auto bailout of $25BN is basically a rounding error to the total bailout number). You can also assume that President Obama and his strong Democratic Congressional majority will also enact some type of universal healthcare reform, costing an estimated $75BN per yearthat the Treasury Dept. doesn’t currently have.

But as steep as the bill will be for the bailout and Obamacare, it actually pales in comparison to the unfunded obligations that the Federal Government has related to Social Security, Medicaid and especially Medicare. Current projections for the next 75 years estimate that the cost of these entitlement programs will exceed Government income by $40 Trillion- lets call that $500 Billion per year just to use round numbers.

So clearly, Federal Government’s looming expenditures- even if you don’t count the bailout and the costs of new universal healthcare- are unsustainable. Either the Government is going to have to dial back these spending obligations (not likely) or try to come up with new sources of tax revenue to pay for them (more likely).

There is an interesting article in Fortune Magazine where the author acknowledges these facts and hypothesizes what the “solution” will be.

Here’s the key take on the funding need, assuming continued reliance on the income tax:

Let’s examine the numbers. Under our current tax system, receipts are projected to remain pretty flat, at about 18% to 20% of GDP, far into the future. But spending is slated to rise to 24% of GDP in 2030 and 28% in 2050, excluding interest on the federal debt. If taxes aren’t increased enormously, future deficits, and the enormous borrowing they require, will swamp the budget with ruinous interest costs.

Today, the income tax raises around $1.1 trillion, or around 9% of GDP, with payroll and corporate taxes contributing the balance. The deficit now stands at around $580 billion, including the Social Security surplus that’s helping to pay the bills. But that surplus is also rapidly disappearing. So to balance the budget, America would need to raise income taxes by 53%, assuming the other taxes remained at current rates.

The gap gets far larger in the future, chiefly due to rapidly rising costs of Medicare and Medicaid. To pay for those costs, we’d need to raise taxes by an extra 2% of GDP. That would require an additional $270 billion in income taxes.

All told, that’s a total tax increase of $870 billion, or almost 80%. That’s not including the estimated $240 billion cost of President-elect Barack Obama’s healthcare plan through 2018.

Clearly its not possible to raise income taxes by 80%- I haven’t heard any credible economist suggest that, I don’t believe that even someone as far to the left as Paul Krugman would seriously call for a near doubling of the income tax. Without wanting to inadvertently create a Laffer curve debate here, I think it is universally agreed that massive income tax increases at some point start to drive a reduction in the extent to which Americans work, save and invest- and therefore reduces whatever income there is to be taxed at hypothetical exorbitant rates, ultimately leading to lower tax revenue and negating the benefit of raising those income taxes in the first place.
So what is the government likely to do (again, assuming that it is not capable of making meaningful cuts in entitlement spending)?

The Fortune article surmises that as we approach “European” levels of government spending, we will have to embrace a “European” source of government funding- the Value Added Tax, or VAT.

I’ve never particularly understood how the VAT works, but the article does provide a good thumbnail sketch of how it works:

The VAT is essentially a sales tax, except that it’s charged at each stage in the development of a product instead of at the moment when the product is sold.

Take, for instance, a car with a sticker price of $30,000 and a value-added rate of 10%. Ford might buy its steel and other materials for $8,000 plus $800 in a VAT tax. A dealer then pays $25,000 plus a $2,500 tax for the finished vehicle. Ford takes an $800 credit for the tax it already paid and sends $1,700 to the government. A buyer then pays $30,000 for the SUV and $3,000 in taxes. The dealer collects the $3,000, takes a credit for the $2,500 worth of taxes already paid, and sends $500 to tax authorities. Ultimately, the government pockets $3,000, or 10% of the retail price of the car, in taxes.
The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn’t arouse nearly the uproar caused by increasing income taxes.

The VAT becomes necessary because our current tax system is so progressive that the top 10% of households are now paying about 2/3rds of total income taxpayments. For the reasons noted above, squeezing those top 10% households to make up the looming spending shortfall simply isn’t realistic. And expanding income tax rates to the 90% “non-rich” in the country is political anathema for the Democrats, who hate the rich, and the Republicans, who hate raising taxes.

But the VAT is a way to start eliciting some more tax dollars from that lower 90% without causing those folks the brain damage of filing a 1040. And the VAT has a discretionary element to it- you don’t want to pay it? Fine, just don’t buy so much. And while putting this fancy sales tax into place will no doubt have a negative effect on economic growth, the Euro-socialists have apparently found that it is less detrimental to economic growth than taxing the top 10% wage earners into oblivion. The VAT is also popular with the Euro crowd because purchases don’t fall as sharply in a recession as incomes might (especially incomes for the top 10%). Also, its easier to raise the VAT because the individual payments are small- a 1% increase on a $50 purchase translates to just $0.50. Certainly those $0.50s add up over the course of the year, but the assumption is that most people don’t pay enough attention to notice.

I’m not writing this as a proponent of the VAT. My preference would be to see massive spending cuts and entitlement reforms. But I don’t think that is likely. Unfortunately our spending outlays were already unsustainable relative to our income tax base and will probably be made more so by the unfolding financial bailout and the likely Obama-Universal Healthcare plan. When something is clearly unsustainable, you have to ask yourself how it will be resolved. I am a pessimist about curtailing government spending. No doubt there will be some cutbacks, but nothing close to what’s necessary to offset the massive tax increase that will be needed. If I had to guess, I expect that we’ll have a worst of both worlds by keeping the current progressive income tax system that sticks it to the top 10% and adding in some sort of phased-in VAT to shake extra money out of the lower 90% to plug the difference.

But regardless, keep an eye out for “tax reform” proposals that reference the VAT. Odds are we are going to wind up paying it in some form before the dust settles with the current mess.

I’m sure that I share the frustration that many of you have about Senator McCain’s absolute refusal to make an issue out of the fact that Barack Obama chose to call one of the most hateful figures in modern America – Jeremiah Wright – his close friend and mentor and to sit in the pews of his church for 20 years.

As it’s abundantly clear that the media is entirely in the tank for Obama and unwilling to hold him to account on any issue, let alone the Wright relationship, so therefore Senator McCain’s silence on this issue amounts to the free pass of a life time for the Illinois Senator.

More than anything, the Rev. Wright issue is about judgement- that either either Obama judged there to be nothing particularly troublesome about Wright’s hateful bile for 20 years until the national spotlight started shining on him, or (and this is less plausible) Obama was so oblivious to Wright’s hateful rantings that he was genuinely taken aback when he discovered that he “didn’t know Wright as well as he thought he did.”

Regardless, Obama’s 20 year membership in Trinity United makes it absolutely impossible for me to consider voting for him, whatever his actual positions may be. Let me be totally clear- if any white candidate, conservative or otherwise, had been a member of a church where such anti-American and/or racist hate was spewed for one year, let alone twenty, I would be unable to support him, regardless of how much I might agree with his policies, and it is actually arguably racist to give Obama and Wright a free pass on this just because they are black (the soft bigotry of low expectations now gets applied to love of country and fellow citizens).

Clearly, the only reason John McCain continues to refuse to make an issue out of the Obama-Wright 20 year relationship is because he is overly concerned about the risk that either (1) if he (McCain) were to win, African Americans would be so emotionally distraught not just from having one of their own come so far for the first time and fail, but fail in part because of a racially tinged issue that it would do irreparable harm to race relations in America or (2) if McCain made an issue of it and Obama still won, white middle America might have developed such hostile feelings for Obama that he would be unable to govern.

Regardless, one thing is clear- the guy who says Country First lives what he preaches when it comes to the Obama-Wright issue. John McCain would apparently rather lose an election than risk doing something that could damage race relations in America. He is an incredibly honorable man and a true American patriot. I just hope it doesn’t mean he’s politically suicidal. At any rate, Barack Obama owes him the thank you of a lifetime. As much as Obama’s free pass on this issue frustrates me, at least I am proud to say that I am a member of the Republican party that has gone out of its way to avoid racial antagonization to a far greater degree than the race hypocrites in the Democratic primary.

Finally we get beyond the cute (though reasonably effective) Paris/Britney add and have the 529s coming into the mix going for a little more than flesh wounds.

Check out this linkto a group called “American Issues Project” and the ad they have put together asking tough- but I think we would all agree fair- questions about Bill Ayers and Obama’s relationship (friendship?) with Ayers. I suspect it frames things in a way Hillary very much wanted to but could’t. The guys on our side better be able to make more hay out of it that she did. Have a look.

Byron York at NROhighlights a breathtaking snippet from Terry Moran’s interview with Obama yesterday:

TERRY MORAN: The surge of U.S. troops, combined with ordinary Iraqis’ rejection of both al Qaeda and Shiite extremists have transformed the country. Attacks are down more than 80% nationwide. U.S. combat casualties have plummeted, five this month so far, compared with 78 last July, and Baghdad has a pulse again. If you had to do it over again, knowing what you know now, would you — would you support the surge?

OBAMA: No, because — keep in mind that —

MORAN: You wouldn’t?

OBAMA: Well, no, keep — these kinds of hypotheticals are very difficult. Hindsight is 20/20. I think what I am absolutely convinced of is that at that time, we had to change the political debate, because the view of the Bush administration at that time was one that I just disagreed with…”

So essentially Obama is saying, hey, I don’t care that the situation in Iraq has improved so dramatically, that US casualties have fallen from 78 last July to just 5 so far this month, I will never acknowledge that President Bush was right in any way regarding Iraq.

This just floors me, that Obama, rather than allow for the possibility that he was wrong about something, if he had to do it over again would have preferred to have US troops come scurrying home in a humiliating defeat last year instead of supporting the course of action that has improved the situation so dramatically and has us at the point where its possible to envision victory.

In his rejected New York Times EditorialSenator McCain noted that Obama “never talks about winning the war—only of ending it.” He should keep hitting Obama on that point, and on this bizzare unwillingness to acknowledge that it was a good thing that the surge happened.

Wasn’t one of the Left’s biggest complaints against Bush for the past eight years the allegation that he was incapable of acknowledging he was ever wrong about anything? Interesting, isn’t it, now that the shoe is on the other foot.

According to Novak (via Drudge), Senator McCain will be announcing his VP pick this week. The most recent favorite for the pick seems to be Mitt Romney.

I think it smacks of lack-of-headline desparation while The One soaks up all the political oxygen this week on his world tour. But at the same time, if McCain doesn’t want to start slinging the mud – aka telling the truth about the elitist, Marxist Obama – then his options are limited and he needs to do something to counter the media adulation on Obama.

I wish he could have hammered Obama this week on the ground in places like OH, MO, CO and VA – I think a lot of folks in middle America will actually be quite bitter while witnessing Euro-worship with Obama’s million man march in Berlin. I think there’s an effective political play to be made against Obama on this point, and I wish McCain would focus more bashing Obama on it than a stunt like early VP announcement.

As for the actual announcement, Romney is a fine guy, but its not clear to me what he really brings to the table electorally. Part of the problem for Senator McCain if he does pull this stunt is that it needs to be someone exciting enough to justify the headline grabbing effort. Do Pawlenty or Sanford meet that test? I like them both, but I doubt it.

But ultimately I give McCain points for at least trying something creative if he does it.

NRO has a copyof President Bush’s remarks from Tony Snow’s funeral. I’m not going to lie, I had a lump in my throat by the end.

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