Alix Walker examines the taxation policy of the Obama Administration.
Alix Walker, Staff Writer
Ideology: Moderate Conservative | Writing From: Madison, CT
With tax receipts expected to drop 18 percent this year, the economy is dealing with a hard blow to government revenues. The big question being asked across the nation, but not being answered honorably by the Administration, revolves around tax increases. Denials from the White house are only adding annoyance to the feelings surging around the stress already felt by the taxpayers. Not only will the “middle class” be struck with fresh tax increases, but so will everyone living in America.
Pretending that only the wealthy are going to pay for the massive spending increases is quickly getting old and not believable. From coast to coast, all residents will have to hand over more of their own money to the government in one-way or another. This is not about new tobacco or alcohol consumptions taxes, or even about the massive tax-grab that will come from Cap and Trade and Obama Care. Rather, this is about new tax measures, and new taxes on everything that can be squeezed for cash, starting with your income.
Our taxes are about to increase dramatically. The Administration is proposing to build a government well beyond anything that national revenues will be able to support either in the mid-term, or the long-term. With the nation stuck in a long-term economic quagmire and hurting all taxpayers who are already feeling the weight of chronic tax creeping, the imposition of obvious and visible new income taxes is politically dangerous. The sophistication of the speciousness will find new levels of creativity during the coming weeks. The White House will no doubt launch a campaign to “talk-up” the economy in the hope that positive proclamations will make them so. The reality is that unemployment, which is well above the claimed 10%, is somewhere around 16% when you include “marginally attached workers” as well as those employed “part time for economic reasons,” calculated as the “U-6 rate” by the Bureau of Labor Statistics.
Unemployment increase is neither a turn around, nor a bottom to the recession, and is a far different reality from the “8% or less” predicted by the Administration when it launched its stimulus program. Tax receipts are apparently down by 22 percent on individual incomes, and are down 57 percent on the corporate front. Blended with a deficit that will surge to almost $2 trillion this year, and a national debt accelerating past $11.6 trillion, options are limited. We can assume that cutting federal spending is an ideological impossibility, leaving the government with two principal choices, and neither induces positive outcomes. You can be asked to sacrifice and have your income taxes increased massively, or the dollar’s value can be allowed to drop significantly as more of them get printed.
Hopefully the path will be a less harmful blend of both of these alternatives. The key will be to allow the dollar’s value to slide gradually so that there are no sudden shocks striking at the heart of national and international markets. International creditors like China will be irritated, but will accede to the gradual process of easing down the dollar. Forget the doomsday scenarios, however, America will take years to work its way out of this recession, then pay off past and current government spending sprees, on its way to growing through the new financial demands on its treasury that will surface over the next decade from bay boomers, social security and healthcare.
I don’t think there are any fast solutions to this whole mess, but hopefully we won’t dig ourselves any deeper.
I would like to point to the last line of your article, which was very well written and very well argued in my humble opinion, where you say that the US shouldn’t dig itself any deeper. I would argue that letting the dollar slide would do just that for the exact reason you mentioned. Internationally, this would ruin us. China’s irritation is no longer something to ignore as they own (as of May 2009) over 800 billion dollars in US treasury bills. As a country, we are hardly exporting anything and the strength of the US dollar has a lot to do with that. We are not at the point yet where we can let the dollar slide to let the price of foreign imports go up (a virtual tariff) as we don’t have the American Business left to replace foreign importations. This, if anything, would be a tax on our middle class, as the upper class can afford to pay for the difference.
While Inflation seems like the obvious choice, it is not the best one. In this one circumstance, I can take a page from the conservative book and say that the free market will handle this one (with a little help from the stimulus). We need to be looking at other ways to help unemployed (ie healthcare).
I would like to point out one of the initial causes in the increase in unemployment –> inflation. Inflation during the Bush years led to a mass exodus of American companies out of America and into the open arms of countries like China. When we bring business back to America (and strengthen working class rights through bills like EFCA) then inflation is a legitimate option. But as of right now, it would be an imprudent choice.
At the risk of making a bit too normative a statement for an economist, you’re conflating two separate economic issues here. When it comes to the economics of the federal budget, you have to distinguish between the short-run and the long run.
In the short run, recession-driven deficits (and boom-driven surpluses) are necessary as part of prudent fiscal policy. That is why we have progressive tax rates and other income-based forms of taxation: when national income goes down, it makes sense to prevent disposable income from dropping as quickly because it props up demand and cushions any recession driven drop, ultimately making the recession more shallow and minimizing the costs of the downturn. In other words, the government SHOULD run large deficits in a recession. That is completely sustainable and actually helps end recessions faster and ultimately increases growth in the long run.
The real trouble with the US fiscal stance is that we have long-run structural deficits. Basically, we borrow in good times and borrow even more in bad times. The tax code needs to be changed, but that is cumulatively the fault of all the administrations since Reagan when debt as a percentage of GDP started exploding (and households also started saving less, making us pay for that borrowing from abroad rather than through domestic savings). The tax code needs to be changed so that we don’t run deficits every year, or at least so that the public debt grows more slowly than the economy does (if GDP grows by 3%, and we run a 1% deficit, the public debt is effectively shrinking as a percentage of GDP). What sounds worse: borrowing $2T once to get out of a recession and paying for it over 10 years or borrowing $500B every year in perpetuity?
To sum up: short-term deficits in recessions good, structural deficits bad.
We already have a government that is so far beyond its ability to support itself that we can hardly blame Obama for his proposals and high taxes. Yes, he does want to dig us deeper, but we’re bankrupt as-is.
We need a long, sustained surplus budget to fix the mess we’re in. That likely means higher taxes AND massive spending cuts. Who’s going to be first to sell that to the American people?