We have major long term budget problems. The debt's going to growing for the next few years for the most part from the large deficits Obama inherited.
Is Obama going to be able to navigate both good economic policy and political reality?
Len Burman is worried...
I’m really worried. I have no doubt that this president understands our long-term fiscal problems and their potentially catastrophic consequences. I know for certain that his top advisers understand because I have worked with most of them. And the president has said the right things—he does give a great speech—but his actual proposals would just make things worse.
There’s simply no way that we can get out of the hole if we extend most of the Bush tax cuts, extend most of the expensive new “stimulus” tax cuts for the middle class, and pass a host of expensive new spending programs, even if we raise taxes on those making over a quarter million.
Bush was wrong when he implied that we could fight terrorism by going to Disney World, and Obama is wrong when he implies that only the well off will have to sacrifice to get our finances back on track.
I understand that the president is not going to talk about tax increases during a recession, and he shouldn’t, but I sure hope that he is prepared to ditch the happy talk when the economy is on the mend.
In the meantime, I’m looking for any sign that he’s willing to spend some of his political capital pushing important but politically difficult positions. So far, I’ve been disappointed.
Luckly once we are out of the recession the tax increases that are required to make up the revenue problems we've had is not that big of a deal. We are a low tax nation when compared to other industrialized nations.
We have to let the Bush tax cuts expire--which I fear Obama will fail to follow through on. Also I like Dean Baker's idea about a financial transaction tax (FTT) that he talked about recently in tax debate in The Economist:
There is a long history in both the United States and the rest of the world with FTT. Until 1964, the United States imposed a tax of 0.12% on new stock issues and 0.04% on stock trades. Britain still has a tax of 0.25% on each stock sale or purchase, raising five billion pounds a year. This would be equivalent to roughly $30 billion a year in the American economy.
Robert Pollin and I calculated that a scaled set of FTT on stock, futures, options and other financial instruments could raise approximately $150 billion a year. This would go far towards bringing the long-term budget deficit down to a manageable level.
A FTT would be hugely progressive. While many middle income families own stock, their holdings are dwarfed by the holdings of the wealthy. Furthermore, few middle income families are active traders. Their intention is to hold their stock to support their retirement or their kids' education, not to shuffle it around on a daily or hourly basis. Some mutual funds do engage in frequent trading. An FTT would encourage investors to move their money to funds that are less active traders, thereby allowing them to escape most of the impact of the FTT.
Most of the burden of the FTT will fall on wealthy individuals who are active traders and also on the financial industry itself. Either way, the tax will be overwhelmingly borne by the wealthy. By raising the cost of trading, the tax will discourage the trading that provides the revenue for the financial industry. A well-designed tax should also discourage the creation of exotic assets that may serve little useful purpose, since it could lead to the tax being paid multiple times. For example, the holder of an option on a stock would both pay the tax on the purchase and sale of the option and also on the purchase and sale of the stock itself, if the option was ever exercised.
While most taxes impose some economic cost in addition to the revenue raised, a FTT may actually increase economic efficiency. By discouraging financial transactions that are entirely rent-seeking in nature, a FTT will reduce the resources used up by the financial sector, without affecting at all its ability to serve the productive economy. The reduction in trading volume will of course reduce liquidity to some extent, but American financial markets will still be quite liquid. Even with a 0.25% tax on a stock sale or purchase, transaction costs will still only be raised back to their mid-80s levels. And, the United States had a large and very liquid stock market in the 80s.
There also is a powerful element of justice in imposing a FTT in the current situation. The main reason that the budget situation has deteriorated so much in the last two years has been the damage caused by the irresponsibility and greed of the financial industry. In this way, a FTT can be seen as sort of a user tax, where the industry is effectively forced to pay for some of the damage caused by its practices, just as we might like to tax the output of industries that pollute our air or water.
In short, there is a very good argument for increasing taxes on the wealthy given the current budget situation. The alternative is taxing those who are not wealthy. And, there is no better way to tax the wealthy than to tax their gambling in financial markets. A financial transactions tax will raise revenue at the same time that it makes the economy more productive. This is a genuine win-win situation.
Low taxes don't in of themselves make the best places to live... the true measure is in what people want/desire--if they pay for services that people want or find valuable then its not a major burden. I know Ivory Tower types who just don't like taxes on principle will disagree, but its not an economic argument, its a political one.
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