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March 26, 2009
News Analysis: What You Can't See Might Hurt You
Joseph J. Thorndike

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Middle-income tax increases are the Higgs boson of Obamanomics. For those who skipped that day in Physics for Tax Jocks, the Higgs boson is a subatomic particle whose existence has been predicted by theory but never observed in reality. Scientists are pretty sure it exists, but they can't tell you what it looks like.

Obama's tax policy has the same elusive quality. Sure, we know about a few things he wants to do. For everyone in a coma during the past year or so: He wants to raise taxes on the rich. Which is all well and good, especially for an unreconstructed New Dealer like me.

But fat-cat tax hikes are not the solution to long-run fiscal problems. More to the point, everyone in Washington knows they aren't the solution. Neither are corporate tax reforms and beefed-up enforcement. All these things will help, but they won't close a fiscal gap that gets bigger every week.

The Obama economic team certainly understands this reality. And I, for one, think they're unlikely to ignore it. The Congressional Budget Office says cumulative federal debt will reach 82 percent of GDP by 2019. Even the White House sees debt rising to 67 percent of GDP over the same period. These numbers are simply not sustainable.

As Leonard Burman of the Urban-Brookings Tax Policy Center observed even before the release of these sobering statistics: "The consequence of continuing our current course is a fiscal nightmare -- record high interest rates, an economy in shambles, truly confiscatory tax rates just to pay the interest on the debt, and a government that can't provide even the most basic public services."

At some point, Obama will do something to alter that dismal trajectory. He will propose a major tax increase. But what will it be?

Healthy Taxes

Burman thinks it might be a VAT (or at least that it should be). In congressional testimony last May, Burman endorsed a plan advanced by Ezekiel Emanuel of the National Institutes of Health and Victor Fuchs of Stanford University that would yoke universal healthcare to a dedicated 12 to 15 percent VAT. Because a large share of the looming fiscal crisis can be chalked up to soaring health costs, revenue from a VAT would substantially brighten the gloomy fiscal future.

Ultimately, progressive healthcare reform is about curtailing costs, as well as expanding coverage. And as Burman, Emanuel, and Fuchs all point out, a VAT would help stem the tide of rising costs by making them more visible. "Since everyone would pay the VAT, the higher rate could build widespread support for effective measures to control healthcare costs," Burman told lawmakers. "Moreover, the lowest-income 40 percent of households [currently exempt from the income tax] would have a stake in controlling government spending, addressing one of the conservatives' major complaints about the current system."

Is a VAT politically feasible? For decades, conventional wisdom said no. But crisis can open the door to fiscal reform. It's worth recalling that we have never had an economic crisis this severe that didn't produce major tax reform. (Well, at least not for the last century or so.) As they say on Wall Street, past performance is no indication of future results. But still. . . .

Blue Dogs Barking

Of course, new taxes aren't the only road to fiscal salvation. Spending cuts might help, too. My colleague Martin A. Sullivan thinks Obama will be forced to drastically scale back his domestic policy agenda, slashing new spending for healthcare, education, and renewable energy. (For Sullivan's economic analysis of Obama's budget, see p. 1528.)

Sullivan's certainly right, at least to a point. Congress is already carving up the Obama budget with an eye toward lower spending. The Blue Dog Democrats are driving the process, forcing the White House to scale back its ambitious agenda.

But the Blue Dogs can follow that route only so far. What happens if they succeed in derailing Obama's domestic priorities? Ultimately, the Blue Dogs are still Democrats. If Obama fails, they fail with him. That's a lesson made clear in 1980, when Jimmy Carter went down in flames and took the Democratic Party with him.

If the Blue Dogs forget that bit of history, voters will remind them in 2010 or 2012. Democratic spending hawks might survive a voter backlash, especially because many (especially in the House) represent conservative districts. But if Republicans regain their electoral footing in the wake of a progressive policy meltdown, the Blue Dogs will lose the influence they currently enjoy.

Eventually the Blue Dogs will be forced to confront a crucial question: What do they hate more, deficits or tax increases? Over the short run, they can duck that choice, opting instead to chisel at the margins of the Obama spending plan. But sooner or later, reality will intrude.

After all, what's a Blue Dog Democrat without a progressive policy agenda? A Republican.

Let's Get Serious

In fact, all Democrats (not just the Blue Dogs) need to get more serious about revenue. It may seem more palatable -- and prudent -- to spend money on social welfare than self-indulgent tax cuts, but absent long-term funding, both lead to the same place (see sky-is-falling Burman quote above).

Liberal activists (sorry, we're supposed to call them progressives now) are more focused on excommunicating fiscal conservatives than they are on drafting sustainable policy. That's fine, for the time being. Lord knows someone has to keep the flame alive for liberalism (I mean progressivism). But someday the bills will come due.

And when that day arrives, Democrats will need a political discourse that makes room for adequate revenue. They will need new ways of talking about taxation. If Democrats want a more robust, useful, and relevant government, they must rescue the notion that taxes are the way to pay for it.

You don't get handed that sort of rhetorical tool. Even a once-in-a-lifetime economic crisis won't deliver it unbidden to the hands of a waiting Democratic majority. You have to build it. And that's hard work, so Democrats might as well get started.