RAHN: Obama Has No Plan B

President Obama has just presented his new budget, which again ignores reality. It contains another trillion-dollar deficit, which assumes a large increase in revenue resulting from a tax-rate increase on “the wealthy” and corporations. He knows, and so does everyone else, that Congress is not going to pass the tax increase. Even if it did, the projected revenues would not be forthcoming because the “wealthy” people would change their behavior and find other ways to obtain income, and economic growth would decline, costing tax revenue. Corporate taxes are paid by consumers in higher prices and by workers in lower wages - so much for the promise not to increase taxes on those making less than $250,000. Every good tax economist knows this, but the president chooses to ignore reality and demagogue the issue.

Even more disturbing is the lack of discussion about a contingency plan if his projected economic scenario does not work out - and the probabilities are that it will not work out. The reality is that the United States and most other governments, particularly the Europeans, have reached or are close to reaching the limits of their ability to tax and borrow. This situation means there is going to have to be either massive cutbacks in government spending or very high inflation.

Everyone knows that if an individual or a business takes on too much debt, the interest payments on the debt eventually will crowd out all other spending unless one radically cuts spending or declares bankruptcy. Governments differ. The ones that print their own money, such as the United States, usually resort to inflation as a way to reduce the real value of government payments and the real value of the debt, leaving bondholders holding the bag. Governments that do not print their own money, such as Greece, California and Illinois, are forced to cut spending radically - whether they want to or not - or default on their debt, unless some other government or international agency chooses to bail them out.

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