Eco Prof: Higher Taxes Are Inevitable

Economics professor Thomas F. Cooley says that Obama’s campaign promise that he would not raise taxes on the middle class “is unsustainable.” Furthermore, Cooley says, “Virtually every individual and every investor will face higher taxes.”

The dashed vertical line shows where we are right now (end of government fiscal year 2009). Everything beyond that is a projection (read: wishful thinking) based on these assumptions — no new spending programs, expiration of the Bush tax cuts, no more adjustments to the Alternative Minimum Tax, and very optimistic assumptions about economic growth over the next decade. Even with these assumptions, it is not a sustainable path.

Cooley suggests that because Obama can’t raise taxes directly (his poll numbers are already in the dumper), new taxes will be levied in the form of value added taxes, something Cooley calls “a stealth sales tax,” and warns:

Value added taxes can be a good fiscal tool. They are less distorting than other taxes, so if they substitute for other taxes that can be a good thing. But they have one huge drawback: Once they are in place they can be increased with a stroke of the budgetary pen. They become an ATM machine for spendthrift politicians. Europe has relied heavily on VAT for decades. Average rates in the E.U. are around 20%, but they can be much higher. In Germany, they started out at 4% but are now at 19%.

If we end up addressing our fiscal problems with a value added tax without cutting some other tax rates and spending, we will be on a very slippery fiscal slope. Credibility is something that is very easy to lose with irresponsible fiscal policy, and very, very hard to rebuild once it is lost. Right now it is leaking away.

Precisely. And yet that is where we are headed. Democrats have no desire to reduce federal spending and Republicans do not have the stomach. In the end, the price of everything we produce will go up, more manufacturing will move offshore. Where will we be with more jobs lost and higher prices?

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Posted April 8th, 2010 Filed in Economics and the Economy, Taxes and the IRS