Boehner Has Obama by the Boondoggles
by Gary North: Free
Harvard and MIT Education. Private Colleges Will Die.
I begin with
North's law for dealing with political Keynesians: "When you've
got them by the boondoggles, their hearts and minds will follow."
1, 2013, federal taxes will go up. There is no way around this.
One way or the other, federal taxes will go up.
There are some
questions associated with this forecast. First, which taxes will
be going up? Second, who will wind up paying most of these taxes?
Third, what effect will this tax increase have on the American economy?
Obama is beginning
to sound as though he is ready to compromise in some way with John
Boehner over some kind of substitute tax program. Boehner is making
similar noises with respect to his willingness to compromise in
some way to work out a deal with Obama. The problem is simple to
state: (1) Boehner has said that he will not accept any tax revision
that places additional taxes on the wealthy, and (2) Obama is philosophically
opposed to anything that is going to raise taxes on the poor.
The tax that
would really generate a great deal of revenue is the value-added
tax. The VAT has been used for a generation in Western Europe to
extract enormous wealth out of the taxpaying population, which is
The VAT has
this advantage from the point of view of the government: there is
no escape. The tax is imposed on all profitable transactions along
the chain of sales. Any business that makes a profit is going to
have to pay the VAT. There is no way to hide from the tax collector.
He collects mostly from businesses, and businesses have detailed
records of what they spend. The digits are easily available. So,
there is no place to hide.
The other advantage
of the VAT is that it is paid by everybody who makes a retail purchase.
It is not exactly a sales tax, but it is close to it. If you buy
a product, you pay your share of the tax that was imposed on the
retailer. If you do not buy, the retailer is hurt, because he has
paid the wholesaler. The wholesaler has to get his money back, because
he already paid the tax when he purchased the item from the producer.
The producer paid the tax when he bought raw materials in the open
to top, everybody pays on any profitable transaction. This means
that it is a comprehensive tax, in a way that no other tax is. It
is comprehensive in the sense that everybody who makes a retail
purchase pays it, and also in the sense that no business can escape
it. This is why it generates so much revenue.
with the VAT for Obama is that it is a flat tax. The poor cannot
escape from it. If they buy something, they pay this tax. Even worse
from the point of view of Obama, everybody pays the same percentage.
Rich and poor, middle class and lower middle class, everybody who
makes a retail purchase is paying the same percentage of his income.
This is why
the Democratic Party never comes out in favor of the VAT. The VAT
is ideologically irreconcilable with the wealth distribution policy
of the Democratic Party. The Democrats want the rich to pay a higher
percentage of their income to the government than the poor man pays.
With the VAT, everybody pays the same.
The big problem
with the VAT is that Republicans would probably favor it over any
other kind of new tax. Precisely because it is a flat tax, which
means that, from the point of view of modern political rhetoric,
it is a regressive tax, Republicans would be more willing to vote
for this than for an increased percentage of extraction from the
rich. Reverse this argument, and you have the Democratic Party's
view of the VAT.
are dealing with a lame-duck Congress, and because the President
has been reelected, this would be the ideal time for the government
to impose a VAT, assuming that the Democrats have the votes in the
Senate to get it passed, and also assuming that Obama is willing
to compromise. In my opinion, Obama is always ready to compromise.
So, the crucial issue here is the Democratic majority in the Senate.
Will these people vote for what is essentially a comprehensive sales
tax on all transactions? My assumption is that the Senate will not
do this, but my assumption is also that the House of Representatives
would go along with this before it would go along with a tax on
I think the
best we can hope for is that there will be no agreement coming out
of Washington this year. The Bush tax cuts will go out of existence
on January 1. We will revert back to where we were in the final
days of President Clinton. The advantage with this is that we know
at least some of the effects of this tax increase. We have paid
into this system in the past. There is nothing radical about it.
The other advantage
of doing nothing is that there will be automatic spending cuts.
The main loser in this round of spending cuts will be the Pentagon.
Republicans generally do not want to cut the budget of the Pentagon,
while Democrats are far more willing to do this than Republicans
are. So, from the point of view of the Democrats, the automatic
sequestering that will begin on January 1 would seem to be an advantage.
Compared to a comprehensive sales tax on all added value across
the boards, which will be paid for by all members of society at
the same percentage rate, doing nothing would seem to be the ideological
safest road to tax reform that the Senate's Democrats are likely
There is no
question that we are facing what Bernanke has called a fiscal cliff.
There is no question that the combination of increased taxes and
reduced federal spending will produce a lot of unintended unpleasant
consequences. No one really knows what the effect of these spending
cuts will be, but it is clear that this is the right path for the
government. Cutting spending is crucial for the continued economic
growth of the American economy.
I have no illusion
about any tax policy somehow solving the problem of the unfunded
liabilities of Social Security, Medicare, and Medicaid. There is
no solution to that problem other than default. Somebody is going
to have his income reduced when the deficit in the General Fund
gets so large that interest rates will start going up. Social Security,
Medicare, and Medicaid are all running red ink. This red ink has
to be made up by payments into the trust funds by the Treasury.
This requires that Congress find a way to raise revenue, or at least
to sell Treasury debt to naïve investors who think this can
go on forever.
are upset by the fact that government spending will be reduced.
Austrians are delighted by the fact. Keynesians are in no way concerned
if rising taxes are imposed mainly on the rich. Republicans in Congress
don't like the sound of that. They will resist it if possible. They
have the votes to resist in the House. The Republicans can stop
any attempt by Obama to increase taxes on anybody. Obama knows this.
not have to compromise at all. If he stands his ground, and tells
party members not to vote for any proposed increase of taxes on
the rich, he can defeat Obama. He has the upper hand.
ON THE FISCAL CLIFF
is concerned about the fiscal cliff, then he is concerned about
something the government has already accepted. That compromise was
made in 2011. That fight does not have to be fought again.
will face the prospect of a recession in 2013, but it will be a
bipartisan recession. The Democrats voted for this solution, and
Obama accepted it. The Republicans can point to the Democrats and
blame them if there is criticism of the Republicans for not doing
anything to change the tax code. It will be very difficult for Democrats
to blame the Republicans for intransigence, when the changes in
the tax code that will automatically begin on January 1 were already
voted on by Democrats.
want to maintain the existing level of federal spending. They want
to do this by extracting more wealth from the rich. There's nothing
new here. It is business as usual for Democrats. The Republicans'
resistance to the suggestion is also business as usual.
the Congress can do is going to solve the problem of the unfunded
liabilities of Medicare, Social Security, and Medicaid. It is all
kabuki theater. The on-budget deficit of $1 trillion is a bad joke.
The real deficit is at least 11
times larger. There is no way to solve the problem of the unfunded
liabilities of the federal government, other than by some form of
default. Somebody's goose is going to get cooked. Politically, it
is not clear whose goose will be cooked, but somebody's surely will
So, from this
time on, Republicans will blame every downturn in the economy on
Obama. There will be no way, from this point on, for Obama to point
the finger at Bush. If the Bush tax cuts automatically go out of
existence on January 1, we will revert back to the Clinton tax program.
At that point,
Obama becomes a gigantic donkey, and the Republicans' political
task will be to pin the tail of recession on Obama. He will not
be able to spend the next four years complaining that it is all
Bush's fault. Once the Bush tax cuts go out of existence, the
resulting recession will be all Obama's fault. He knows it,
the Republicans in Washington know it, and the Democrats in the
Senate know it.
This is why
Obama is not in a good bargaining position. For the next two years,
and possibly four years, he will not be in a good bargaining position.
The Republicans hold the hammer. All they have to do is nothing,
and whatever happens, at least if it's bad, they will get to blame
on Obama and the Democrats. When the Bush tax cuts lapse, we move
back into Clinton territory.
plays his cards right, he will be in the catbird seat. "Don't
blame us." The Democrats have control of the Senate. The Democrats
have control of the White House. The tax policies were invented
by Clinton. The Republicans fought the tax increases that Clinton
imposed on them. So, there is no way for the Democrats to get out
of the line of fire. They are going to have to grin and bear it.
This, and this
alone, is why Obama may be willing to accept a VAT. I hope he is
not. The VAT is a devastating tax on business, and it will lead
to increased unemployment. Coupled with the effects on businesses
that Obamacare will impose on them, this will be the double whammy.
Rising taxes and rising medical health insurance costs will combine
to push the economy into recession.
I am not at
all worried about the cuts in federal spending. The more austerity,
the better, I say. The larger the cuts, the less Keynesianism. Keynesianism
believes that federal spending is what holds up the economy. Keynesians
come in many varieties, from conservative to radical, but they share
this in common: they think federal spending increases productivity,
and therefore increases employment. Austrian school economists reject
this theory of economic cause-and-effect.
From a political
standpoint, the Republican Party is in an ideal position to reap
the benefits of inaction. All they have to do to become political
victors is nothing. If they sit tight, kick the can down the road
again, refuse to raise taxes, and allow spending cuts to fall where
they may, they will get to see Barack Obama twisting slowly, slowly
in the wind. I think it couldn't happen to a more deserving guy.
My fear is
this: Republican Keynesians, believing that federal spending cuts
are bad for the economy, by accepting all the nonsense that austerity
for the government means austerity for the economy, are going to
stand on the sidelines and scream at the House of Representatives
to make some kind of tax deal. The best possible tax deal politically
for Republicans is no deal. The best possible tax deal politically
for the economy is no deal.
What we need
is a massive austerity for the government. But we are not going
to get that in 2013.
Given the fact
that we are not going to get massive austerity for the federal government,
which is another way of saying a massive tax rebate to the American
people, we should come out in favor of the status quo. The status
quo will mean a large target on the backside of President Obama.
The Democrats are in control of the White House and the Senate.
There is no way that they are going to be able to get away with
blaming the Republicans for doing nothing, because the agreed-upon
spending cuts and tax hikes were a bipartisan operation in 2011.
If Romney had
been elected, then he would be the sacrificial lamb. He would be
out there begging the Democrats to work some kind of deal. He would
be the one trying to keep the tax hikes and the spending cuts from
going into effect. He would be the political target. The best he
could do would be to blame everything on the mess he inherited from
Obama. Obama has played the Bush card for four years, but there
is no way that he will be able to play it for the next four years.
soon as real tax pain is imposed on the American voters, as soon
as unemployment begins to move up, as soon as the recession begins
to wipe out pension funds, everybody's eyes will turn, as always,
to the savior state in Washington, DC. Voters will be demanding
that the government do something, when the crisis that is upon them
is the result of what the government has already done.
What is Obama's
fallback position? He cannot blame Bush for the next four years.
He cannot blame Bill Clinton for the tax system that Clinton rammed
down the throats of the Republican Party in the middle of the 1990s.
He cannot blame Bernanke, because no President has ever blamed the
Chairman of the Federal Reserve. Presidents are allowed to blame
other politicians for the evils of the age, but they are not allowed
to blame the Federal Reserve System.
Obama has to
have somebody to blame, but he has run out of plausible candidates.
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
2012 Gary North
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