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Transforming America

The president has brought change to America.

12:00 AM, Mar 27, 2010 • By IRWIN M. STELZER
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The administration’s deficit-fighting takes the form of increasing taxes on the riches and, less overtly, on the middle class that Obama promised would not pay one dime in new taxes. Families earning more than about $250,000 will have their marginal income tax rate increased from 35 percent to 39.4 percent when the Bush tax cuts are allowed to lapse, and capital gains taxes will go from 15 percent to 20 percent. In addition, the health care bill levies a hospital tax of about 1 percent of income, and 3.8 percent on some portions of their incomes, including interest, dividends, and short-term capital gains.

But revenues from these taxes won’t begin to make a dent in future deficits, which the CBO estimates will still exceed 5 percent of GDP as far ahead as 2020. Which is why it is now generally accepted that the president’s commission on fiscal reform will recommend adoption of a European-style value-added tax (VAT). A 3 percent levy would bring in $300 billion per year -- $280 billion if food is exempted. Throw in inflation of around 4 percent per year -- the number the International Monetary Fund’s economists are now recommending as a target to replace the 2 percent most central banks are using -- and the deficit just might become manageable. 

These taxes and the president’s other measures will indeed transform America -- to a nation modeled on Europe’s social welfare states. Government will be more intrusive. The health care bill provides for over 16,000 new tax inspectors to make sure that every American has health insurance or has paid a fine, which by 2016 will come to $2,085 or 2.5 percent of income, whichever is higher. Emissions from not only coal plants but privately operated lawn mowers will be regulated. Standards by which schools will be judged will come increasingly under the jurisdiction of the federal government, and will include preferential access of minorities to advanced classes, who will also have priority claim on funds allocated to health care research.

Incomes in this new world will be more equal. The incomes of families earning more than $250,000 and of those in ranks of middle earners will be taxed more heavily to fund programs for lower-income groups. And, if the president has his way, and persuades congress to grant legal status to the 13 million illegal immigrants now in the country, the cultural mix of the citizenry will have been changed. That would cost about $30 billion for the health care entitlements of this new group, but in the great scheme of Obama things that will be a small price for completing the transformation of America. The bigger price will be the lost growth due to declining incentives that will make entrepreneurial risk-taking less worthwhile. 

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