Hillarysworld

Read @ Prospect.org

A New White House Economic Strategy?
The plan would put deficit reduction ahead of job creation.
Robert Kuttner | May 13, 2010 | web only

Over the past week, top White House officials have been floating a trial balloon for their strategy on the economy. At its core is a decision to put deficit reduction ahead of job creation.

The premise is that the bond markets and allied deficit hawks are demanding action to cut the budget, that Obama lacks the votes in the Senate for a serious jobs initiative, and that polls show voters care more about deficit reduction than about jobs.

So the plan, modeled closely on the work of the Peter G. Peterson foundation and the anticipated report of the president's own fiscal commission, is a deal that includes cuts in Social Security plus a new Value Added Tax (VAT), in order to get deep cuts in the deficit. As a sweetener to get Republicans to back the VAT, White House officials would cut the corporate income tax.

The plan is dubious economics and worse politics. You could hardly hand the Republicans a better gift for the fall election. Imagine the GOP TV spots, Fox talking points, and Wall Street Journal editorial: Obama Administration Has Secret Plan to Raise Your Taxes and Cut Your Social Security.

Continues @ Prospect.org

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If there is anything ever that screams ONE TERM at the POTUS, the combination of
- not focusing on job creation
- adding VAT
that would be it.

Adding VAT would significantly reduce spending and spur a savings driven economy. Question is whether investments will come from that. Will the government incentivize investing in the economy and will entrepreneurs bite when competition domestically and from abroad is so intense and payback is so shaky.

For sure, it is Supply side economics. But it is significantly in a different direction than what this country has seen before.

Combination of the above with introduction of carbon tax will further tighten people's budgets. There are some very difficult days ahead.

Republicans will be hard pressed to not agree to reducing deficit after having hammered on balancing budget and reducing deficit for more than a year. Question is whether VAT will be supported.

I do not favor VAT, but understand the drivers and know that it can fix the budget deficit.  BUT, a VAT once introduced will be here forever.  Will a VAT reduce income tax? I doubt it.

VAT finds a way to make tax money off the aged population. With babyboomers retiring, bulk of the economy is heading into retirement years. VAT finds a way to make them keep giving as they consume.  So, the effect of VAT is the unexpected impact on the retired. This is definitely not good politics from the electorate viewpoint.

VAT also puts the goverment on a direct competition path with the state goverments at the cash register. Some states already have very high state and local taxes.  For example, we pay more than 8.25% at the cash register already, and our expected gratuity is 25%. Yep!  You give 15% you are in trouble next time you visit there.  Introduction of VAT is likely to result in cut in gratuity - and that is bad for people who depend on that for their livelihood - and BTW their wages area adjusted downward [and their minimum wage requirement is lower] if they are gratuity-eligible.  In high COLA states, VAT is VERY bad news.

-- Edited by Sanders on Friday 14th of May 2010 09:15:05 AM