Tuesday, September 7, 2010

Orszag Calls for VAT Tax; Warns on Deficit

Former Obama OMB head Peter Orszag is out with an NYT Op-Ed calling for a VAT tax.

Writes Orszag:
It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

How would we do this?

One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system.

He then goes on to say that it is politically impossible to get a VAT through Congress, but what he is really doing is softening the ground, among the D.C. set, for such a tax.

NYT tells us that now that Orszag has left the Administration he will be writing at nytimes.com/opinionator in addition to be a contributing columnist.

Oh joy. Paul Krugman used to be the worst econ adviser/columnist at NYT. But he is a one trick pony who simply calls for huge Keynesian deficit spending. Orszag is a completely different animal. He is part of the species common in D.C. who roams the city with severe brain freeze.

He is very smart, but refuses to use his cranium for any analysis that will displease the ruling elite. With my own two ears, I heard Orszag this summer state that ObamaCare was about "throwing stuff against the wall and seeing what sticks."

You have to be pretty smart and have brain freeze to understand you can't micro-manage the healthcare system, but, at the same time, be in favor of ObamaCare, which is all about micro-managing healthcare.

It is scary, therefore, when he does speak truth:
A benign bond market, however, is a luxury we won’t enjoy forever if we fail to tackle our long-term fiscal problem. What’s more, losing the confidence of the bond market could prove painful, since it is widely known that our fiscal trajectory is unsustainable and market sentiment may therefore shift quickly and unpredictably. In any case, as the economy recovers, the dominant problem will move from depressed demand to excessive budget deficits...

Let’s look at the facts. The projected deficit for 2015 is 4 percent to 5 percent of G.D.P., depending on whose assumptions you use. A sustainable level is more like 3 percent or lower. So we need deficit reduction of 1 percent to 2 percent of G.D.P., or about $200 billion to $400 billion a year by 2015. These figures are uncertain, but they’re the best we have (and they may well turn out to be too optimistic).

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.
Someone like Orszag is only spouting these facts, now, because he knows it is okay, in the elites playbook, to warn of the huge deficit problems. It's okay for one reason, in the not too distant future, say after the mid-term elections, the plan is to raise taxes (perhaps even introduce Orszag's favored VAT) by scaring the public about the deficit.

The U.S. really needs to default on its debt, and tough luck to those who bet on government by buying Treasury securities. This won't happen, of course, but it is the only way to free up the economy. Higher taxes only suffocate the economy by putting more of the economy in the hands of government, where Orszag and his D.C. colleagues can speak from their frozen brains and support whatever new program comes along to expand the totalitarian state.

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