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Game Plan for a Flat Tax, Social Security Cutbacks and Austerity
Obama’s Sellout on Taxes
by MICHAEL HUDSON

I almost feel na?ve for being so angry at President Obama’s betrayal of his campaign promises regarding taxes. I had never harbored much hope that he actually intended to enact the reforms that his supporters expected ? not after he appointed the most right-wing of the Clintonomics gang, Larry Summers, then Tim Geithner, Ben Bernanke and other Bush neoliberals.

But there is something so unfair and wrong that I could not prevent myself from waking up early Tuesday morning to think through the consequences of President  Obama’s sellout in the years to come. Contrary to his pretense of saving the economy, his action will intensify debt deflation and financial depression, paving the way for a long-term tax shift off wealth onto labor.

In achieving a giveaway that Democrats never would have let George Bush or other Republicans enact, Obama has laid himself open to the campaign slogan that brought down British Prime Minister Tony Blair: “You can’t believe a word he says.” He has lost support not only personally, but also ? as the Republicans anticipate ? for much of his party in 2012.

Yet Obama has only done what politicians do: He has delivered up his constituency to his campaign backers ? the same Wall Street donors who back the Republicans. What’s the point of having a constituency, after all, if you can’t sell it?

The problem is that it’s not going to stop here. Monday’s deal to re-instate the Bush era tax cuts for two more years sets up a 1-2-3 punch. First, many former Democratic and independent voters will “vote with their backsides” and simply stay home (or perhaps be tempted by a third-party candidate), enabling the Republicans to come in legislate the cuts in perpetuity in 2012 ? an estimated $4 trillion to the rich over time.

Second,  Obama’s Republican act (I hate to call it a compromise) “frees” income for the wealthiest classes to send abroad, to economies not yet wrecked by neoliberals. This paves the way for a foreign-exchange crisis. Such crises traditionally fall in the autumn ? and as the 2012 election draws near, it will be attributed to “uncertainty” if voters do not throw the Democrats out. So to “save the dollar” the Republicans will propose to replace progressive income taxation with a uniform flat tax (the old Steve Forbes plan) falling on wage earners, not on wealth or on finance, insurance or real estate (FIRE sector) income. A VAT will be added as an excise tax to push up consumer prices.

Third, the tax giveaway includes a $120 billion reduction in Social Security contributions by labor ? reducing the FICA wage withholding from 6.2 per cent to 4.2 per cent. Obama has ingeniously designed the plan to dovetail neatly into his Bowles-Simpson commission pressing to reduce Social Security as a step toward its ultimate privatization and subsequent wipeout grab by Wall Street. This cutback will accelerate the point at which the program moves into supposed “negative equity” ? a calculation that ignores the option of restoring pension funding to the government’s general budget, where it would be paid out of progressively levied income tax and hence borne mainly by the wealthy, not by lower-income wage earners as a “user fee.”

So the game plan is not merely to free the income of the wealthiest class to “offshore” itself into assets denominated in harder currencies abroad. It is to scrap the progressive tax system altogether. The Democratic Congress is making only token handwringing protests against this plan, no doubt with an eye looking forward to the campaign contributors two years down the road.

Crises usually are orchestrated years in advance. Any economic recovery typically is shaped by the way in which its predecessor economy collapsed. Medieval Europe’s emergence from the Dark Age, for example, was shaped by ancient Rome’s debt crisis caused by its aggressive oligarchy. In a similar fashion, the coming epochal tax shift off finance and property onto labor will be introduced in response to the dollar’s crisis, in much the way that we have seen Ireland and Greece tap their pension funds to bail out reckless bankers. In America as in Europe, the large “systemically important banks” that caused the crisis will be given enough money by the government ? at the expense of labor (“taxpayers”) to step in and “rescue” the bad debt overhang (i.e., toxic junk).

The tactics of this fiscal game sequence are so time-tested that there should not be much surprise. So President Obama’s deal is not only financial and fiscal in scope, it is a political game changer. When Congressional Democrats sign on to this betrayal of their major election promise, they will be re-branding their claim to be the “non-Wall Street party,”

Barack Obama was trained as a lawyer. I’ve rarely met a lawyer who understands economics. That’s not their mind-set. They make deals to minimize the risk of surprises, often settling in the middle. That is legal pragmatism. When candidate Obama promised “change,” I don’t think he had any particular change in economic policy in mind. It was more a modus operandi. I suspect that he simply thought of the Presidency as being referee on “bringing people together.” Probably this personality trait was formed as a teenager, in the kind of popularity contest that teenagers engage in student council elections. Obama’s aim was to be accepted, even admired, by negotiating a compromise. He probably didn’t care much about the content.

He did care about getting political campaign backing, of course, and the rules for this are clear enough in today’s world. He was given a policy to plead, and a set of experts to plead his case. There are always enough Junk Economics advisors to work on politicians to try and convince them that “doing the right thing” means helping Wall Street. It is not a matter simply of believing that “What’s good for Wall Street is good for the economy.” To hear Tim Geithner and Ben Bernanke tell the story, the economy can’t function without a “solvent” banking system ? meaning that no bank is to lose money. All gamblers on the winning side (such as Goldman Sachs) are to be made whole in cases where they cannot collect from bad casino-capitalist gamblers on the losing side (such as A.I.G. and Lehman Brothers).

So should we say that Obama’s plan really helps the economy simply because the stock market jumped sharply on Tuesday? Or are we dealing with a zero-sum game, where the predator’s subsidy is at the cost of the host economy?

Contra Obama’s pretense, cutting taxes for the rich will not spur recovery. The wealthiest 2 per cent do not spend their income on consuming more. They invest it financially ? mainly in bonds, establishing more debt claims on the economy. Giving creditors more money will deepen the economy’s debt deflation, shrinking “the market’s” ability to spend on goods and services. And part of the tax subsidy will be recycled into Congressional lobbying and campaign contributions to buy politicians who will promote even more pro-financial deregulatory policies and tax benefits. There still has been no prosecution of banking crime or other financial fraud by large institutions, for example. Nor is there any sign of Attorney General Holder initiating such prosecutions.

It is a travesty for Obama to trot out the long-term unemployed (who now get a year’s extension of benefits) like widows and orphans used to be. It’s not really “all for the poor.” It’s all for the rich. And it’s not to promote stability and recovery. How stable can a global situation be where the richest nation does not tax its population, but creates new public debt to hand out to its bankers? Future tax payers will spend generations paying off their heirs.

The “solution” to the coming financial crisis in the United States may await the dollar’s plunge as an opportunity for a financial Tonkin Gulf resolution. Such a crisis would help catalyze the tax system’s radical change to a European-style “Steve Forbes” flat tax and VAT sales-excise tax falling almost entirely on employment? Big fish will eat little fish. More government giveaways will be made to the financial sector in a vain effort to keep bad debts afloat and banks “solvent.” As in Ireland and Latvia, public debt will replace private debt, leaving little remaining for Social Security or indeed for much social spending.

The bottom line is that after the prolonged tax giveaway exacerbates the federal budget deficit ? along with the balance-of-payments deficit ? we can expect the next Republican or Democratic administration to step in and “save” the country from economic emergency by scaling back Social Security while turning its funding over, Pinochet-style, to Wall Street money managers to loot as they did in Chile. And one can forget rebuilding America’s infrastructure. It is being sold off by debt-strapped cities and states to cover their budget shortfalls resulting from un-taxing real estate and from foreclosures.

Welcome to debt peonage. This is worse than what was meant by a double-dip recession. It will be with us much longer.

MICHAEL HUDSON is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com