After an initial kerfuffle with the editors of the Des Moines Register regarding his interview with them, the president has revealed what he told them – mainly his plans for a second term. First and foremost on the list is a tax increase of over $1 trillion.
In the interview, the president talks about meeting “the target that the Bowles-Simpson Commission established of $4 trillion in deficit reduction” with a ratio of “$2.50 worth of cuts for every dollar” in tax increases. If you do the math, that translates to a tax increase of $1.143 trillion – easily the largest tax increase in American history (and, it should be noted, far, far more than would supposedly come in from reverting to Clinton-era tax rates on wealthier Americans).
No wonder the president didn’t want this interview to be released at first: he openly acknowledged his first order of business would be a massive tax increase. He even goes so far as to trumpet the “Bush tax cuts expiring” – for everyone – and the “sequestration in place” – something he insisted on Monday would never happen – as stepping stones. The Romney ads practically write themselves.
The fact that the president thinks he can say one thing to the editors of the Register and another thing entirely to the American people in a presidential debate is bad enough. However, this is more than just a political error, more even than a damaging example of terminological inexactitude; this is a serious policy mistake that must be averted at all costs.
For starters, the economic damage done by tax increases is almost always underestimated.Taxes are a cost to businesses, and increasing them (especially on the scale of $1-trillion-plus) will have a crippling effect on the supply side of the nation’s economic equilibrium (in fact, this is the fundamental argument of the “supply-side” school of economics). Keynesian, demand-driven analysis never takes this into account, and thus the damage done by tax hikes is simply ignored out of most projections by economists among Democrats.
As a result, tax increases never meet their revenue projections.This was one of the reasons I have repeatedly insisted that tax hikes have no place in an deficit reduction plan. Because the damage to the economy is understated, the impact of the economic damage on government revenue is also underestimated. We saw this throughout the 1980s and 1990s. This also has its own secondary effects – the largest one being that deficit reduction plans usually end up being junked before the spending cuts take effect, in exchange for new plans that include even more tax increases, creating a vicious cycle.
Normally, this would be bad enough from a policy perspective, but in this case there are two other factors that make the president’s plans even worse.
First, $4 trillion in deficit reductions – even if that figure is reached (and given the above, it won’t be) – leaves $11 trillion on cumulative deficits over 10 years. In other words, the president is trying to claim deficits averaging $1 trillion a year as the fiscal equivalent of “mission accomplished.” Now, one could say in response that much of that deficit would be covered by a return to normal growth patterns, which would return revenue to its usual 19% of GDP and cut the deficit in half all by itself. All that does, however, is bring us back to the damage done to the economy by the $1-trillion-plus tax hike the president is demanding.
Secondly, the president’s reliance on Simpson-Bowles as a model is horrifically flawed.As I revealed earlier, S-B makes a dramatic error in revenue assumptions (they assume 21% of GDP, not 19%) that creates a $900-billion hole in annual projections. That’s right: Simpson-Bowles is more likely to result in deficits of $900 billion a year than in balanced budgets.
So, just to summarize: the president – in complete refutation of what he’s told the American people for months – wants to start his second term with a $1-trillion-plus tax increase that will do massive economic damage he refuses to see and won’t come to close to the deficit reduction he wants, based on a plan that’s off by $900 billion a year in its projections.
I can think of no better rationale for ensuring the president never sees that second term.
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