Tax Analysts Blog

Old Promises, New Realities

Posted on May 27, 2009
Washington Post reporter Lori Montgomery does a good job of summarizing the current prospects for a U.S. value added tax: we could sure use one to pay for healthcare and/or to reduce the deficit. But the chances of the U.S. adopting a VAT anytime soon are slim. Yes, there is rising interest in the tax among policy wonks, but that has only increased chances of serious consideration by Congress from one in a thousand to one in a hundred. Republicans would love to make an issue of it, and Democrats will never give them that opening.

In the Wall Street Journal former Clinton administration Labor Secretary Robert Reich laments that Obama made a campaign issue out of McCain's proposal to tax high-end employer-provided health benefits. It may be the "only good option" for paying for healthcare. But Obama's reluctance to renege on campaign promises could frustrate his healthcare ambitions.

So, guess what? Politicians are avoiding new taxes like the plague. That's always good politics. And sometimes it is even good economics. But the days of tax cuts' economic virtue may be fast coming to an end. Why? Because the potential stimulus and productivity benefits of tax cuts will be offset by rising interest rates and fears of inflation due to rapidly rising debt levels.That means the gap between good politics and good economics is widening. Politicians will need to make tough calls or flirt with long-term economic malaise.

The latest warning on the U.S. fiscal mess comes in an op-ed piece in today's Financial Times from respected economist John Taylor ("Exploding Debt Threatens America"). Taylor writes: "I believe the risk posed by this debt is systematic and could do more damage to the economy than the recent financial crisis." Fear of long-term government deficits is reflected in the interest rates on long-term government debt, as shown in the chart below. Over the last two months the yield on 30-year bonds has increased from 3.66 to 4.44 percent.

These rising rates were behind the headline in today's Wall Street Journal that should send shivers down budget Director Peter Orszag's spine: "Treasurys Sell Off as Safe-Haven Appeal Tarnishes." The Journal reports: "The selling extended the rout of longer-dated Treasurys that began last week on worries that sharply rising deficits could lead to an eventual loss of the U.S. government's triple A credit ratings." That's reality. When will Congress stop pretending to live in fiscal fantasyland?

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