Every politician (except Michael Dukakis) has campaigned on some version of “no new taxes” and most ended up breaking that promise.
It’s how we do things in America, and as voters we’ve come to accept how it works. We’re masochists. We like to be lied to.
Obama said he wouldn’t raise taxes on anyone making under $250,000, a promise that’s technically already been violated by new taxes on cigarettes and his pledge to sign cap & trade if it gets through The Senate. His aides would say those don’t count.
But evens setting those aside, real tax hikes are almost certainly in the works, if only due to the massive amount of new spending (particularly on healthcare) this government has planned. The idea that it can all be financed on the (dwindling) $250k+ crowd is absurd.
Roger Altman of Evercore Partners and formerly of the Clinton administration writes today in the Wall Street Journal:
Only five months after Inauguration Day, the focus of Washington’s economic and domestic policy is already shifting. This reflects the emergence of much larger budget deficits than anyone expected. Indeed, federal deficits may average a stunning $1 trillion annually over the next 10 years. This worsened outlook is stirring unease on Main Street and beginning to reorder priorities for President Barack Obama and the Democratic congressional leadership. By 2010, reducing the deficit will become their primary focus.
Why has the deficit outlook changed? Two main reasons: The burst of spending in recent years and the growing likelihood of a weak economic recovery. The latter would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. Yes, the President’s Council of Economic Advisors is still forecasting a traditional cyclical recovery — i.e., real growth of 3.2% next year and 4% in 2011. But the latest data suggests that we’re on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011.
A speedy recovery is highly unlikely given the financial condition of American households, whose spending represents 70% of GDP. Household net worth has fallen more than 20% since its mid-2007 peak. This drop began just when household debt reached 130% of income, a modern record. This lethal combination has forced households to lower their spending to reduce their debt. So far, however, they have just begun to pay it down. This implies subdued spending and weak national growth for some time.
Altman believes that sometime next year the Congress will be forced to bring up a new tax, possibly some kind of Europe-like VAT scheme.
Others have suggested that Obama will wait until after the 2012 election, when he’s a lame duck though that may be too long a wait if the budget situation continues to deteriorate.
Bear in mind, this isn’t all coming from Wall Street or conservative publications eager to undermine Obama’s presidency.
Liberal commentator Matthew Yglesias penned a highly praised piece for the American Prospect arguing that liberals needed to embrace taxes sooner rather than later, and that selling Americans on the idea of higher taxes should be part and parcel with selling Americans on the idea of a more active role for government in life — which Obama has done pretty well, both in the campaign and since taking office:
Are broad-based tax increases politically viable? Nobody can say for sure, but polling during the campaign season consistently showed that despite Obama’s promises, around half of the public anticipated paying more taxes if he won the election. And a Rasmussen poll showed in March that 66 per cent of the public believed Obama was likely to raise taxes on voters making less than $250,000 a year. Yet his approval ratings are high. Politicians who labour under suspicion of being tax raisers might be better off defending tax hikes on the merits rather than denying the charge. The White House and its allies vigorously contest conservative charges that auctioning off carbon permits amounts to a tax, when they should be acknowledging that conservatives are correct and explaining why such a tax is necessary.
Progressive taxation is an important principle. But the idea that further changes to the tax code should exclusively target the wealthy is ultimately counterproductive. Making the case may be difficult, but refusing to try to make it amounts to conceding defeat. At the end of the day, persuading people to support a more active role for government means persuading all of them that such a government is worth paying for.
None of this will make business leaders very happy (though more and more are eager for a national healthcare system that shifts that particular burden to the government), but this is about political reality. Thinking the government can occupy more space than it currently does without costing more is dreamy.
And that being said, it’s almost scarier if we don’t raise taxes, not because we want to see higher taxes, but because a failure to do so would be yet another sign that political leaders have lost any will to make difficult choices. It’d be a sign that the whole government is California, perpetually promising way more than it can realistically deliver.
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