Tim Geithner and Alan Greenspan were on ABC’s This Week this morning; both talked about the need to bring down the federal deficit, which is soaring to unprecedented levels under President Obama. Here is George Stephanopoulos’s exchange with Geithner:
GEITHNER: … Remember the critical thing is people understand that when we have recovery established, led by the private sector, and we have to bring these down, deficits down very dramatically.
We have to bring them down to a level where the amount we’re borrowing from the world is stable at a reasonable level. And that’s going to require some very hard choices. And we’re going to have to try to do that in a way that does not add to the — unfairly to the burdens that the average American already faces.
STEPHANOPOULOS: But that’s the dilemma…
GEITHNER: That is the dilemma.
STEPHANOPOULOS: … isn’t it? Because even when you look at health care reform again, I know you believe it’s going to bend the cost curve over time, but the Congressional Budget Office says at best the health care reform plans out there are going to be deficit-neutral over the next 10 years.
So to bring the deficits down there’s not enough money in the discretionary budget. We all know that. That means more revenues. The president has said that taxes won’t go up for any Americans earning under $250,000. But it doesn’t appear he’s going to be able to keep that promise if you’re going to bring the deficits down.
GEITHNER: George, again, we can’t make these judgments yet about exactly what it’s going to take and how we’re going to get there. But 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.
Not only is “health care reform” not sufficient to bring down the deficit, the Congressional Budget Office has bluntly said that the plans now being proposed by the Democrats will raise, not lower, the deficit. That leaves higher taxes.
Here is Stephanopoulos’s exchange with Greenspan:
STEPHANOPOULOS: So the plans on the table don’t go far enough, in your view?
GREENSPAN: That’s my view, and in fact, I think that — I thought the secretary’s remarks were, frankly, quite well balanced, and I think that is the strategy of the administration. But what he didn’t spell out, which he can’t actually, at this particular stage, is that very significant additional actions are going to be required to make certain that the deficit does not…
STEPHANOPOULOS: That means control of Medicare, control of Medicaid, control of Social Security, but also we’re going to have to see some kind of broad-based revenues. Roger Altman, who I quoted, the former secretary — the former deputy treasury secretary, says that the real answer in the long term has to be that we move towards the value-added tax or sales tax.
GREENSPAN: I don’t like a value-added tax, but I agree with Roger. 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.
But a value-added tax would “add to the burdens that the average American already faces,” whether unfairly or not. The alternative, presumably, is higher taxes on “the rich.” But the “rich” are already paying far more than their fair share. The latest IRS figures show that the top 1 percent of taxpayers pay more in federal income taxes than the bottom 95 percent combined; click to enlarge:
That is simply ridiculous. It is questionable whether democracy can survive in a situation where a tiny minority is paying the bills for just about everyone else. This chart shows the IRS numbers in a different format; again, click to enlarge:
Top earners currently pay around double what they would pay if all income were taxed equally. The Obama administration and Congressional Democrats intend to increase those already near-confiscatory rates, but they cannot do so without both an economic and a political cost. As Michael Barone has demonstrated, President Obama was elected by a “top and bottom coalition.” He carried lower income earners and those with incomes over $250,000 while losing the middle class. If he jacks up income tax rates even higher, he will be left with a “bottom only” coalition–not an inviting prospect.
Moreover, as Alan Greenspan pointed out, increasing marginal income tax rates will “significantly impact the economy.” But Greenspan’s “least worst” alternative, a value-added tax, would hit all consumers and would be, I assume, a political non-starter.
All of which means that there are stormy days ahead for the Obama administration.