Ok, so the essence of Obama’s fiscal policy is to increase taxes and fees on business and on the top-earning 5% of the population. Everyone else gets tax cuts and vast increases in services, like national health insurance and enforced production of electric cars. And of course, the government has to keep stimulating the economy, because shlubs like you and I are so uncertain about the economic future that we’d rather save our money than spend it.
So what do you do when you’re the latest in a long line of Presidents to pledge fiscal responsibility while spending world-record amounts of money? You borrow the money you need to keep the string going. Obama’s first year in office will see a deficit of almost $2 trillion, about four times the biggest deficit that George W. Bush ever ran.
There are two problems with this, one minor and one serious. The minor problem is that Obama promised us a fiscally-responsible Presidency. He’s on record with a promise that when he leaves office, the Federal deficit will be no larger than 3% of GDP. (His first one will be 12% of GDP.) That’s not a problem because Obama can say whatever he wants and people will believe it. He will certainly claim that he fulfilled this promise, and be given credit for doing so, regardless of reality.
The serious problem is that no one knows what the impact will be of borrowing a trillion or more dollars every year for the forseeable future. Today, the public debt of the US is a bit more than 40% of GDP. Sometime in the next five to ten years, it will hit 100%. Already there are signs that the bond markets are starting to find it a lot less attractive to lend money to the US Treasury.
The bottom line is that Obama is going to have to find a source of funding for the Federal budget that goes beyond knocking the profitability out of the private sector, and borrowing every dollar he can get his hands on. This is a matter of simple reality, even given current projected levels of Federal spending.
It gets quite a lot worse when you add in the cost of the vast range of new public initiatives that this President and his supporters promise to implement.
So at some point, you’re stuck. You can’t confiscate all business profits because that will leave you without an economy, and you can’t suck out all the private capital because the high interest rates will leave you without an economy. And higher income and payroll taxes are verboten, because you promised to cut those taxes. (And besides, it’s politically expedient to do so.)
There’s only one answer: a VAT, or value-added tax. Europe and Canada have had one for years, and it generates a gusher of revenue because it’s largely hidden from view. What happens is that every business that adds value to a good or service pays a tax on that value. The tax gets baked into prices at every step, so there’s no big ugly percentage that a consumer has to pay, as with a sales tax.
You start off with a tiny percentage, maybe less than 1 percent, and you expand it steadily as you need revenue. In Europe and the UK, it’s gotten up to the high teens now. This of course is in addition to income and payroll taxes.
My expectation was that Obama would wait till after the midterm election in November 2010, and then start sending out surrogates to float the idea of a VAT. After he himself was safely re-elected in 2012, he would come out and champion the idea himself and get it done.
It looks like we won’t have to wait that long. Already, the PR push has started. Eighteen months ahead of what I thought the schedule would be.
Let’s be responsible about this. There’s no possible way we can fund national health care, expanded spending on infrastructure and electrified motor transport, and the still-TBD overhaul of the education system. Unless we the people are prepared to go to the ballot box and say NO to increasing the scope of the federal government, then we’re going to need a VAT. It really is the only way out of the box.
And before you say it: No, that’s not what I’m advocating. I would strongly prefer to eliminate all taxes on capital and business profits, and a credible end to Obama’s personal interference in business. That approach would actually cause the economy to grow.
But I don’t think that’s very likely, do you? If we the people really do choose to embrace state capitalism and a far greater role for the government in the economy, there aren’t any other options. The question we really should be debating isn’t how to pay for bigger government, it’s how big we should let government get.