Trojan (Tax) Horse

By INVESTOR'S BUSINESS DAILY | Posted Wednesday, March 25, 2009 4:20 PM PT

Taxes: President Obama creates a special commission to look at tax reform, while Congress looks desperately for new revenues to pay for a vast expansion of government. Get ready for the mother of all tax hikes.



Former Fed chief Paul Volcker will head Obama's six-member tax commission which will be charged with, as Bloomberg.com put it, "closing loopholes, streamlining the law and generating revenue."

The way things look, the government will need the money.

The nonpartisan Congressional Budget Office says Obama's proposed budget comes up short on its estimates for spending, revenues and deficits — virtually everything.

Over 10 years, the CBO says, the cumulative deficit will reach $9.3 trillion, $2.3 trillion more than expected in the White House budget. Spending would jump permanently to 23% of GDP — and possibly higher — from 20% last year, a $1.7 trillion gain over that time.

Meanwhile, tax revenues will be reduced by $2.1 trillion over the next decade, in large part because the CBO expects the economy to perform far worse than the White House does.

To put it mildly, Congress is alarmed. So is the president.

They're alarmed because their plans call for a historic increase in the size of government, and they've suddenly realized the money won't be there. Washington's broke. The Democrats want nationalized health care, trillion-dollar bailouts and stimulus plans, thousands of pork-barrel projects, an expansion of the welfare state, carbon taxes and more cash for Social Security and Medicare.

The math is clear. In the next five years alone, Obama's budget adds $5.7 trillion to the U.S. debt. That's $48,000 per household. Put in perspective, servicing that debt each year will cost as much as the annual defense budget by the end of the decade.

Today, the federal government spends about $24,172 per household. That will grow to $32,463 by 2019, after adjusting for inflation — for a real spending gain of 34%. Paying for all this will take money — vast, unprecedented amounts of it. Yet, on the stump last year, Obama promised that 95% of Americans would get a tax cut under him, and that only the very wealthiest would pay more.

So the Volcker-led tax commission starts with its hands tied. It has to find ways to take more taxes from corporations and the rich, without hiking taxes on anyone with less than $250,000 in income.

Which makes us wonder: Is it just a Trojan horse for a massive tax hike on the rich, or for huge tax hikes on all Americans?

Apparently, the White House doesn't realize that taxes on the rich and corporations are ultimately paid by the poor and the middle-class through higher prices, lower incomes and fewer jobs.

Wealthy Americans won't sit still and let their wealth and incomes be stripped from them. They'll find ways to avoid the greedy hand of government picking their pockets.

There's a better way, and we hope the Volcker panel is listening.

From 1953 to 1982, tax rates were at their highest. As Heritage Foundation analyst Brian Riedl recently noted, during that time, the economy was in recession 21% of the time and the stock market rose 5.4% on average. This culminated in the 1970s, when inflation hit 13% and interest rates 19% under Jimmy Carter.

Since the broad-based Reagan cuts in 1982, the economy has been in recession just 10% of the time, inflation has never gone above 5%, interest rates have never been over 12%, and the stock market — even after two record drops — has averaged gains of 7% a year.

Reagan slashed taxes and simplified the code, and revenues and growth soared. That's what works, as dozens of studies prove.

So if they're sincere, Obama's tax reformers have a choice: follow the tax policies of Reagan and thrive, or those of Carter and fail. To us, it's a no-brainer.