Tuesday , 25 June 2024

Volcker: Tax Hikes Likely Needed to Tame Deficit

The United States may need to consider a European-style value-added tax and a carbon or other energy-related tax to help bring deficits under control says White House adviser Paul Volcker. Words: 758

Though he acknowledges that both are still unpopular ideas, he believes getting entitlement costs and the U.S. budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he concluded while addressing the New York Historical Society recently.

This has generated considerable reaction from such sources as the Pragmatic Capitalist* (www.pragcap.com) and Ian Campbell. Edited excerpts of their respective views are as follows:

The Pragmatic Capitalist Disagrees with Volcker
Talk about a great plan to derail the consumer and any shred of recovery we might be seeing. Now, if Mr. Volcker had said the following I might not be outraged: ‘Inflation is beginning to run a little hot and unfortunately, we’ve spent a great deal of money on banker’s salaries, stimulus plans and healthcare in the last 12 months so your taxes are going to be raised’. But tax hikes in the name of balancing the budget?

It’s now quite clear that Mr. Volcker can be added to the crew of leaders who don’t understand exactly how our monetary system works (yes, it is as frightening as it sounds and unfortunately, entirely true). We do not fund our spending via taxes. We do not print bonds to finance our spending. China is not our banker. Neither is Japan and neither is anyone else.

As the sovereign issuer of the currency in a non-convertible floating exchange rate system we simply print money and control the money supply via monetary operations, taxes and spending. At a time when inflation remains low, the output gap high, unemployment at 25 year records and low capacity utilization there is almost no fear of runaway inflation. In fact, deflation remains the greater threat despite Bernanke’s attempts to reflate via mal-investment.

Regardless, Mr. Volcker is not worried about this. He is clearly catering to the fear mongering of the deficit hawks and those who truly believe we can default on our national debt. He is wrong.

The Pragmatic Capitalist’s Conclusion
Raising taxes of any kind at this time is a severe hurdle to any economic recovery – even if done for the right reasons. This is not only the wrong reason to raise taxes, but a horrible time to raise taxes. The consumer remains too fragile, the private sector too indebted and aggregate demand too low.

*http://pragcap.com/volcker-tax-increases-coming-soon-to-an-economy-near-you (The proprietor of The Pragmatic Capitalist is the founder and CEO of an investment partnership. Prior to establishing his own business, TPC worked at Merrill Lynch Global Wealth Management.)

Ian Campbell Agrees with Volcker
As I see it, the U.S. at the Federal level can, indeed, continue to incur deficits and print money – as long as there are buyers for the debt so created. Unless I am missing something, U.S. State and Municipal governments – each of which have their own individual revenue and spending agendas – can’t do that. Maybe this system works at the Federal level for a seriously dominant economy but I don’t see how it can work where an economy is weakening virtually every month against its trading partners. I don’t see the U.S. running net trade surpluses going forward, and I don’t see the lost manufacturing jobs returning to the U.S. in meaningful numbers.

I agree that U.S. consumer spending is key to U.S. economic stability and that increasing taxes at all levels would be negative to that but, at the same time, even if you can print money, running continuing deficits has to continually debase the money you print. If you can’t print money (read State and Municipal Governments) you are between a rock and a hard place that prospectively will squeeze you to death as they merge together.

Ian Campbell’s Conclusion
To say Volcker is wrong, at least in an ‘end-game context’, is just ‘plain silly’.”