Tax Hike Inevitability

When France and the UK announced super-sized taxes on bank profits and employee bonuses last month, we warned, “Interested parties in the US should keep an eye on this, too…lest you think Mr. Peace Prize and his Pay czar aren’t tempted to do the same.” Well, here we go:

“Obama Weighs Tax on Banks to Cut Deficit,” headlines today’s New York Times. Details are still very vague, but word on the Hill is that next month’s 2011 budget will include a tax that is, as the Times puts it, “based on the size and riskiness of an institution’s loans and other financial holdings, or a tax on profits.”

We get the pretty idea of it all: Avenge the downtrodden taxpayer, calm the populist ire and shush those WASP “tea baggers” and their insistence on fiscal responsibility. But what a tangled web… and slippery slope. (Can those metaphors work together?)

Here’s a REAL budget crisis: “Within 12 years, without an increase in interest rates, the single-largest line item in the federal budget would be interest on the federal debt,” former Comptroller General David Walker told NPR yesterday. “That means more than defense, more than Social Security, more than Medicare. And that’s, obviously, not acceptable.

“It’s OK to run a deficit in the short term, when you’re in a recession, when you face serious challenges dealing with housing and financial markets. It’s not the current deficit that I’m concerned about. It’s the structural deficit that will exist whether the economy’s growing, whether or not we’re at war, no matter what the circumstances are. The dangers are that we end up losing the confidence of our foreign lenders. They end up wanting to charge much higher interest rates. The dollar declines dramatically, and the effect on that on the budget, on the economy and on, frankly, Americans, the cost of credit and other things is not a positive sight…

“There’s absolutely no question that taxes are going to have to go up. When you look at the promises that have been made for Medicare — for example, $38 trillion underfunded, Social Security $7.7 trillion underfunded, plus military and civilian pensions and retiree health care — to make the numbers work, you have to restructure those programs, constrain spending and raise revenues.”

The Daily Reckoning