Democrats say they are serious about reducing the federal deficit, but the only
policy proposals they are seriously considering would just add to it.
The next step in the Democratic playbook, however, is rounding into view: a
value-added tax. The groundwork is being laid by the Center for American Progress, a
policy and political organization with very close ties to the Obama administration.
The center recently published a paper on the deficit and accumulating federal debt
with the plainspoken title, "Deal with It."
The paper's thesis is that the debt current policy will mount might cause economic
problems. At a minimum, rising debt service obligations will crowd out spending for
other good things progressives think the federal government should be doing.
This is a useful recognition of reality. Those who think the federal government
needs to be highly proactive to combat recession are willing to excuse the current
deficit as desirable and necessary. The universally disturbing thing about the Obama
administration's budget projections is that total public debt rises from 41 percent
of GDP in 2008 to 70 percent in 2011, but then never goes down for the remainder of
the decade. The federal debt hasn't exceeded 50 percent of GDP since 1956.
Even for those not inclined to hyperventilate over deficits, this is a worrisome
The Center for American Progress says that the deficit can't be tamed either by tax
increases only on the rich or only through spending cuts.
The former is a useful point. According to the center's calculations, it would take
a 70 percent increase in taxes on corporations and individuals making more than
$250,000 a year, on top of the increases President Obama has already advocated, to
balance the budget.
The claim that controlling spending can't do the trick is dubious. From 1960-2000,
federal revenues averaged 18.2 percent of GDP. The Obama administration projects
that they will be 19.2 percent by 2019, or comfortably above the historical average.
Spending, however, is projected to be 23.2 percent of GDP, well above the 1960-2000
average of 20.3 percent.
If spending were brought back in line with its historical average, in 2019 there
would be a deficit of only $250 billion, compared to the current projection of $917
billion. It would represent about one percent of GDP and be in the range of the
long-term capital stuff the federal government buys annually and for which financing
is a sensible option. In other words, not a worry.
And at the historical average in 2019, federal spending would still have increased
at a rate of nearly 5 percent a year since 2000.
Keeping federal spending within the historical average will require tough choices
since so much of federal spending is on autopilot. But it shouldn't be dismissed as
Liberals, however, want to expand the economic footprint of the federal government
beyond its historical bound. And they are increasingly realizing that taxing the
rich won't get them there.
Hence, the growing recognition that broad-based tax increases will be required if
this level of spending is to be supported. The center's paper didn't specify any
taxes for consideration. But its president, John Podesta, has publicly and
conspicuously been discussing the value-added tax. He's clearly playing Mr. Trial
The value-added tax is a net receipts tax on businesses. It's worth considering as a
substitute for taxes on income. But the left is clearly floating it not as tax
reform, but as a way to finance an expansion of government.
That, of course, would run afoul of candidate Obama's highly prominent, incessantly
repeated pledge not to raise the taxes of anyone making more than $250,000 a year.
That's a promise that's already been broken in what could be argued to be small or
indirect ways: an increase in the federal cigarette tax, the cap-and-trade induced
increase in electricity costs, the health care mandate.
A value-added tax would bust the pledge in a very big way. But even liberals are
beginning to acknowledge that Obama's tax promise cannot be squared with his - and
their spending ambitions.