Tuesday, February 24, 2009

Obama: Tax Increases as a Part of Raising Revenues to Reduce the Budget Deficit

According to the New York Times, President Obama has an initial plan for reducing the budget deficit caused by the combination of the bank bailout and the stimulus packages. Primarily components include: eliminating capital gains rates on income generated by hedge funds, letting the Bush tax cuts expire for taxpayers with income in excess of $250,000 and fees from a "cap and trade" program for certain pollutants. Additionally, he plans to reduce spending on Iraq, reducing use of private contrators for Federal government projects and cutting certain Medicare subsidies to private insurors if a government alternative is available.

The possibility of any tax increase doubtlessly will provide talking points for Sean Hannity, Rush Limbaugh, etc., but the Obama plan is pretty restrained--IF it works. The hedge fund taxation will probably only draw opposition from the hard right; the Petreus surge means that we finally can talk reasonably about a sizable draw down in Iraq and the Medicare subsidy cut at least arguably avoids duplicated spending. Other issues are murkier--supply-siders can pose legitimate questions as to whether de facto tax increases on those earning over $250,000 will be effective at raising revenue, there is little evidence of sizable revenues being generated by past "cap and trade" programs and cost savings generated by using Federal employees rather than private contracts may be offset by efficiency of the private businesses. A greater concern than any of the last three; however, is whether cost of living raises in federal salaries and Social Security benefits by expected future inflation will torpedo the cost savings and extra tax revenues generated by this plan. If this happens, Obama could be in the same unhappy place where Bill Clinton dwelt in 1994 and 1995.


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