Tax Analysts Blog

Tax Only the Rich: For How Long?

Posted on Aug 3, 2009

After getting an earful from the Chinese last week about keeping their $800 billion investment safe and sound, Treasury Secretary Timothy Geithner on Sunday made his strongest pitch to-date on the necessity of putting a limit on Uncle Sam's credit card:


    GEITHNER: . . .it is absolutely right and very important for everyone to understand that we will not get this economy back on track, recovery will be not strong and sustained, unless we are -- can convince the American people that we're going to have the will to bring these deficits down once recovery is firmly established.
And on top of this, Geithner did not rule out tax hikes in America's future (emphasis added):

    GEITHNER: . . . the very important thing, and no one is going to care about this more than the president of the United States, is for people to understand that we do not have a choice as a country.

    That if we want an economy that's going to grow in the future, people have to understand we have to bring those deficits down. And it's going to be difficult, hard for us to do. And the path to that is through health care reform.

    But that's necessary but not sufficient. We're going to do some other things as well.

    STEPHANOPOULOS: So revenues are on the table as well?

    GEITHNER: Again, we're not at the point yet where we're going to make a judgment about what it's going to take. But the important thing...

    STEPHANOPOULOS: But you're not ruling it out. You can't rule it out.

    GEITHNER: Well, I think that what the country needs to do is understand we're going to have to do what it takes. We're going to do what's necessary.


Also on Sunday Obama's economic chief Larry Summers was forcefully re-stating in his own way the President's campaign promise to not tax 95 percent of Americans:
    What the President has been completely clear on is that he is not going to pursue any of his priorities--not health care, not energy, nothing in ways that are primarily burdening middle-class families. That is something that’s not going to happen.

So, now what? Given the limitations of further cuts in spendings, there must be tax increases to control the deficit. But there must be no tax increase on the middle class.

That leaves two possibilities. First there are "loophole closers" on tax evaders and poorly behaved corporations--but these measures, though politically necessary, do raise the enormous sums needed. Look for December report from the Volcker Commission as the next flash point in this effort.

Second, there are tax increases on the rich. Our guess is the big tax hike on the rich will take the form of additional social security payroll tax on earnings in excess of $250,000--a proposal Obama floated during the campaign.

But as the New York Times Jackie Calmes article "("Obama's Pledge to Tax Only the Rich Can't Pay for Everything, Analysts Say") points out, even a broad-based tax assault on the rich will not be enough. The great pool of income that paid for World War II (the last time debt-to-GDP levels were this high)--the earnings of America's middle class--must eventually be tapped.

The great political question is WHEN? No doubt White House political strategists will not want broad-based tax increases until Obama's second term (assuming they can get one). Former Fed chief and guru Alan Greenspan sees a value-added tax in our future.
    I don't like a value-added tax, but . . . I think that there is a fairly significant probability that the least worst solution to the problem will end up to be a value-added tax, because it's the only thing that raises revenue in significant quantities without significantly impacting on the economy.

Dr. Greenpan is probably right. But you won't hear a whisper about it from the White House before November 2012.

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