Europe Emerges as the Model for Obama Years
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
One cheer out of a potential three is all anyone can logically give the fiscal-cliff deal. On the day after the bargain was clinched, the stock market gave a 300-point cheer. So be it.
In the short run, extending tax cuts up to $450,000 probably saved us from a recession. If all the tax cuts had expired, we’d have a $500 billion tax hike, plus marginal rate increases, and that would have sunk the economy. So I’m going to bet that the big stock rally was a sign of relief that the final deal wasn’t worse.
The final product was sort of a least-bad tax scenario. The top tax threshold got to $450,000. Capital gains and dividends were capped at 20%. Even the estate tax did better than feared, with a 40% rate off a $5 million exemption. Plus, all the tax rates were made permanent — including the rate for the alternative minimum tax.
So it could have been worse. It probably saved a recession. So that’s the one cheer. But the rest of this story goes from bad to worse.
Let’s start with the absence of spending cuts. The spending sequester was thrown out the window. I have zero confidence that much if any of it will be restored in the next couple of months. The well-publicized ratio of 41-to-1 — tax hikes over spending cuts — is deplorable.
We’ll see during the upcoming debt-ceiling battle whether Congress, including the Republicans, has a real appetite to cut spending. There will be talk about shutting down the government, and even worse talk of a debt default. Right now it’s hard to expect any consensus on real entitlement reform and spending restraint that would limit the federal share of the economy to 20%, which is where it belongs.
That brings me back to the tax problem. The president is going to want between another $600 billion and $700 billion in tax hikes. The recent bill already curbs high-end exemptions and deductions. But get ready — more is on the way from Team Obama. More deduction caps. Maybe a value-added tax. Maybe a carbon tax. Maybe they just keep taxing the rich.
Don’t forget the Obamacare tax hikes, which are estimated to be roughly $1 trillion over the next ten years. That includes a 3.8% surtax on investment income above $250,000 per family, a 0.9% hike in the Medicare payroll tax (also a $250,000 threshold), a 2.3% medical-device tax, new caps on flexible health accounts, and an Obamacare haircut for medical itemized deductions.
In rough terms, when you add the Obamacare tax hikes on successful investors, earners, and small-business owners to the new fiscal-cliff bill, you’re looking at a roughly 12% decline of incentive rewards from lower profitability and less take-home pay.
Of course this is anti-growth. Of course this will reduce the long-term growth potential of the U.S. economy. Of course the added revenues will be spent, bloating the budget and reducing the economy’s potential to grow.
It’s a European economic model. It’s the exact reverse of supply-side economics. You can’t tax your way into prosperity or a balanced budget. The economic pie grows smaller. Government grows bigger. Redistribution and government dependency grow more powerful and pervasive.
Make no mistake about this: Economic growth is the key to reducing the spending, deficit, and debt share of the economy. Specifically, grow the GDP denominator with real personal and corporate tax-rate reform and reduce the demand for government dependency. That’s the solution to our problem. A 20% spending rule would cure the problem even faster.
Unfortunately, we’re going in the wrong direction right now.