WSJ: Let's not forget Obama's already-imposed new taxes

The Wall Street Journal can barely believe that Barack Obama made $1 trillion in new taxes the cost to Republicans for raising the debt ceiling and making cuts in federal spending.   Obama keeps saying that he has cut taxes, but the Journal reminds people that Obama has raised taxes, too — and in key ways that impact capital.  The ObamaCare bill will raise taxes in a number of unpleasant ways, all in support of vast new federal spending and regulatory adventurism, with these just a few of the worst:

• Starting in 2013, the bill adds an additional 0.9% to the 2.9% Medicare tax for singles who earn more than $200,000 and couples making more than $250,000.

• For first time, the bill also applies Medicare’s 2.9% payroll tax rate to investment income, including dividends, interest income and capital gains. Added to the 0.9% payroll surcharge, that means a 3.8-percentage point tax hike on “the rich.” Oh, and these new taxes aren’t indexed for inflation, so many middle-class families will soon be considered rich and pay the surcharge as their incomes rise past $250,000 due to tax-bracket creep. Remember how the Alternative Minimum Tax was supposed to apply only to a handful of millionaires?

Taxpayer cost over 10 years: $210 billion.

• Also starting in 2013 is a 2.3% excise tax on medical device manufacturers and importers. That’s estimated to raise $20 billion.

• Already underway this year is the new annual fee on “branded” drug makers and importers, which will raise $27 billion.

• Another $15.2 billion will come from raising the floor on allowable medical deductions to 10% of adjusted gross income from 7.5%.

• Starting in 2018, the bill imposes a whopping 40% “excise tax” on high-cost health insurance plans. Though it only applies to two years in the 2010-2019 window of ObamaCare’s original budget score, this tax would still raise $32 billion—and much more in future years.

• And don’t forget a new annual fee on health insurance providers starting in 2014 and estimated to raise $60 billion. This tax, like many others on this list, will be passed along to consumers in higher health-care costs.

While Obama wanted Boehner to put higher tax rates on the line for a deal, the President wasn’t willing to part with any of ObamaCare’s new taxes or spending.  The White House did agree to tax reform in exchange for temporarily higher rates, but over the weekend, the Journal smelled a rat — or maybe just paid attention to history:

The proposed deal would also include some kind of “trigger” device, so far undefined, that would compel House and Senate negotiators to complete tax reform discussions over the next several months. We’re told the White House has said it is open in principle to a top rate of 35% on individuals and something like 26% or 27% on corporations—in return for closing various loopholes.

More troubling than these details is the staggered timing. Republicans would be putting their fingerprints on a tax increase in return for spending cuts as a first order of business, which would raise the dividend and top income tax rates to 39.6% (from 35%), or 41% if you include the phase-out of deductions. (Plus the 3.8% payroll tax hike baked into ObamaCare.) Only then would Mr. Obama and the Democrats negotiate the details of tax reform and lower overall rates.

But why at that point would Democrats want tax reform? They’d have achieved their main political goals of a huge debt-reduction deal, getting GOP cover for a tax increase, and putting Republicans cross-wise with the tea party. Raising tax rates first also makes the math of tax reform that much harder to negotiate on both revenue and income-distribution grounds. Under the Beltway’s scoring rules, cutting rates would look like an even bigger gain for higher-income folks and an even bigger revenue loss for the Treasury.

In other words, Mr. Boehner would make his ultimate goal—tax reform—that much more difficult to achieve politically. And that’s assuming the entitlement cuts he gets are genuine—not merely cuts to doctors or hospitals that won’t happen in practice. It also assumes that the “trigger” for tax reform is strong enough to override liberal obstruction in the Senate. We’ll see a unicorn first.

We don’t need to look too far back in American history for a primer on this tactic.  A Democratic Congress convinced George H. W. Bush to raise taxes in exchange for a promise to cut spending in 1990, forcing Bush to reverse his “read my lips” pledge.  Not only did the Democrats fail to deliver cuts or tax reform, they then used the “read my lips” clip in the 1992 presidential contest.  Before that, Democrats in Congress convinced Ronald Reagan to sign an amnesty bill in exchange for reforms in border security and control, only to renege on that as well.

Any deal on taxes will have to come as part and parcel of overall tax reform, not a tax hike with a cross-our-hearts promise to maybe, someday, if-the-weather-is-right conditional pledge to simplify and flatten the tax code on either corporations or individuals, or both.  That will take a lot of work, which is why former CBO director Douglas Holtz-Eakin says that a “grand bargain” was always unrealistic in the time frame needed for the debt-ceiling talks:

It was always too much to hope that President Obama and congressional Republicans could agree on tax reform, Social Security reform, Medicare reform, and Medicaid reform on the accelerated timetable that the debt-ceiling vote requires. So it is hardly surprising that talk of a “big deal” was just that — talk. Now the negotiators are back to the nuts and bolts of a real deal, and let’s hope that they get to an agreement quickly.

On the merits, the outline of the real deal is straightforward. The research indicates that economies that have a dual growth and debt problem should focus on keeping taxes low, and reforming them. Keeping them low is the best possible outcome at present; tax reform remains a 2013 issue. In addition, troubled economies should cut spending, particularly transfer programs and government employment. So spending cuts have to be the focus of the talks.

Vice President Biden has said numerous times that the negotiators had arrived at $2 trillion in acceptable spending cuts. That is a good number — largely for political reasons that I will return to below — but the real test of an agreement is not the size of the cuts, but rather their quality. A good deal will have actual cuts in fiscal 2012 discretionary spending, strong enforcement of medium-term caps on discretionary spending, and real changes to the entitlement programs that lie at the heart of the debt explosion.

Let’s get the debt ceiling off the table with the kind of cuts that Republicans have already negotiated, and move the impasse to the 2012 elections.  Voters can then make their wishes known on whether they want massive, economy-killing tax hikes as a solution to the accelerated acquisition of debt over the last three years, or whether they want — as they made clear in the 2010 midterms — significant reductions in government spending instead.