Politics or Ideology? Obama's Curious Indifference to Trillion Dollar Deficits

It is official. The CBO in its January 4 press statement (The “Fiscal Cliff” Deal) declared that Congress’s January 1 agreement will “produce (ten year) deficits that are smaller— but only by $0.7 trillion to $0.8 trillion.” Thus we face annual deficits of $920 to $930 billion even, in the unlikely case, that sequestered spending cuts go into effect and Obama Care’s costs come in on target. Continuing as is means trillion dollar deficits as far as the eye can see.

Even five years of trillion dollar deficits are unsustainable: At normal interest rates of 5 percent, almost all personal income tax revenues would go to pay interest, which would exceed expenditures on social security! Only the Fed’s Bernanke’s incessant quantitative easing conceals the mess we are in.

As we barrel down the road to fiscal ruin, Obama shows no interest in reforming the entitlements that are driving the crisis. He demagogues those who propose to control discretionary outlays, and he diverts blame to others: “Everything would be fine if the rich pay their fair share,” he repeats, while knowing the U.S. taxes its rich more heavily than any other country.

Obama’s indifference to the looming debt catastrophe could have two explanations (We rule out that Obama cannot do arithmetic. He claims he “can do the math.”)

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Look to Sweden! Obama’s High-Tax Gurus

Peter Diamond and Emmanuel Saez (Wall Street Journal High Tax Rates Won't Slow Growth) offer a beguiling Leftist narrative: The 1% will cough up incremental tax revenue up to a 70 percent rate without cutting the things they do to generate economic growth. We can then use their money to fund “higher-return public investments” (such as Solyndra and the public-education black hole?) without cutting back the entitlement state.

Although Diamond’s Nobel Prize and Saez’s J. B Clark Award make them eminently credentialed, Alan Reynolds (Of Course 70% Tax Rates Are Counterproductive) exposes the convoluted contortions behind their counter-intuitive finding that a tax that leaves you 30 cents on every extra dollar does not affect your decisions to start a new business, assume extra risks, or take on new clients. That’s a hard sell for anyone who thinks about it.

Note that tax guru, Saez, sings a less confident tune when he writes for fellow economists that: “There are no convincing estimates of long-run elasticities of taxable income and marginal tax rates.”  My translation: “We really do not know how taxable income responds to high marginal rates, but we are guessing we can go up to 70 percent.” It pays to read the fine print before making the purchase.

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