Read My Lips: No More Equivocation

“America cannot continue to tax like a small government but spend like a big one.”

–       The Economist endorses Barack Obama Nov. 3rd 2012

The most important issue at stake in this election is the future of the tax code. Mitt Romney has run his campaign on the bold promise to cut income tax by 20%, raise military spending by $200 billion a year and keep a balanced budget. Obama promises to let the top rates of the Bush tax cuts expire while extending the cuts for the middle-class and cutting corporate rates. Both trumpet their policies as economic panaceas, allowing the continued funding of popular programs with minimal revenue increases and, crucially, without worsening the deficit.

Neither candidate has spelt it out to the electorate: either tax rates must increase, or government spending must decrease.

And of course they haven’t – they have an election to win. This is the Scylla and Charybdis of U.S. politics, and in the absence of a latter-day Odysseus neither Obama nor Romney can convince the voters that either of these courses (or a mixture of both) is necessary to avoid an unmanageable deficit.

Let me rephrase that as a question – why is it problematic to run a deficit? In the short term it’s not. Borrowed money is used to stimulate the economy, provide social services and keep taxes low. The theory is that the economy will grow sufficiently that the increased tax revenue will cover the debt. But as the deficit grows to a larger and larger percentage of GDP interest rates increase and growth slows. This is a problem that was hugely exacerbated by Bush Jr., and has been swept under the rug during Obama’s first term.

A lot has been written about the math behind Romney’s plan, and the general consensus is that it doesn’t add up. The idea that these cuts could be implemented without a drop in overall tax revenue is farcical, and even more so when you factor in his proposed increase in military spending and promise of deficit-neutrality. The necessary cuts in government spending would dwarf anything seen in U.S. history, and would almost certainly see a Democrat elected in 2016.

Obama is just as hazy on his specifics. The expiry of the Bush cuts will see the top bracket taxed at a marginal rate of 39.6%, a relatively paltry increase given the extent of the problem. His proposals (like Romney’s) rely too heavily on increasing the overall size of the economic pie, a strategy that has proved to be more based on doctrine than history.

The reality is that neither party is going to seriously curb spending as specific cuts are far less popular than the general idea of cuts. Like it or not, America needs to raise more tax revenue, an idea that Romney has repeatedly written off. Obama will not be so inflexible.

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