The Tax Man Cometh

Despite protestations from politicians to the contrary, it’s becoming somewhat clear that higher taxes across the board — not just for the rich — are in the offing. The sky over Washington is full of trial balloons.

Trotted out in various venues this week were thoughts on a VAT like tax for the U.S. as well as a tax on health care benefits. Still wending its way through Congress, of course, is cap-and-trade which was going to be a big new tax via the auctioning of pollution permits but that one has been neutered a bit.

The biggest news in D.C. was that Ted Kennedy’s committee was ready to float its health care initiative this Monday and that it was at the far left edge of the plans that had been discussed. You can translate that to expensive. Accompanying the talk was talk of somehow dipping into the tax exclusion for employer funded health plans. Naturally it would be means tested (soak the rich) or at least that’s how it would start.

For several weeks we’ve also seen a game of “Whack a Mole” being played with VAT. Someone pops up with a suggestion that we need to start thinking about it as a means of reducing the deficit and someone else says never going to happen. It’s an old Washington game. Get the proposal out there, say it will never happen and then as it starts to take hold ratchet down the objections. The responsibility slowly gets diffused throughout the system, the proposal takes on a life of its own and pretty soon we have a new regime.

Cap-and-trade was supposed to be the big revenue generator but that one got hung up in the realities of Washington lobbying. The big players that would have taken it on the chin and had to pass on the costs to their customers were too regionally concentrated. Too many Democrats would have been in the cross hairs on that one and they were politely reminded of that fact. So now the permits are given away. It will still amount to a tax as companies bounce up against their limits and are forced to buy more permits or engage in costly remediation, it just won’t generate much revenue for the government — initially.

There isn’t much doubt that some combination of a VAT, taxation of health benefits, allowing the Bush tax cuts to expire and probably higher tax rates at the top of the income scale, including much higher brackets for the very wealthy, are in store. The raw reality of unsustainable deficits coupled with the expansionary social policies of the Obama administration allow for no other path.

When you think about it there isn’t an alternative. There is no political will, once a strong recovery is in place, to adopt any sort of austerity program that would work towards bringing the budget deficit down to acceptable levels. Running persistent deficits of the size implied by the current tax structure and spending projections would be economic suicide. The dollar would eventually crash and the ability of the country to fund itself would be compromised. No one in Washington believes otherwise and I doubt that there are more than a few who believe we will see organic growth of the magnitude necessary to close the deficit without additional types of revenue.

The implication is that we are going to trend more towards the European model of economic growth. Benefits directed towards the middle class will create the perception of improved welfare while the potential to move up the income scale will be diminished. The wealthy will see the opportunity to generate substantial new income severely constrained and concentrate more on wealth preservation than creation. The appetite for risk will abate substantially. A comfortable society lacking in dynamism and ultimately in long-term decline.

Were we to admit that there are things we can’t have right now some of this might be avoidable. I don’t think that admission is going to be forthcoming.

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