The deficit plan presented by Obama is atrocious. In short, view he doesn’t want to cut entitlements (so there’s no real long-term solution) and he wants to raise taxes.
Moreover, his Orwellian language about “spending reductions in the tax code” implies that all wealth belongs to the government from the start, and letting people keep a fraction of the wealth they produce is really government spending. Tax revenues may well need to be increased, but in the least destructive ways possible. Obama’s plan calls for more taxes on work and savings (while remaining silent about consumption) – and that’s the worst possible way to raise more revenue.
The perverse incentives of such tax hikes look even worse in light of probable future entitlement reforms. It is mathematically impossible that Social Security and Medicare will still exist in their current form thirty to forty years from now. They will be reformed one way or the other. Almost all potential cuts to these programs are highly unpopular (even among Republicans), and about the only popular cut is for reducing benefits for wealthy retirees. (In effect, the only cuts most people support are the cuts that only affect somebody else – incidentally, the same principle applies to tax increases).
So it’s likely that some form of means-testing will eventually be introduced. I have mixed feelings about means-testing for retirement programs. Means-testing tends to discourage responsible behavior. Social programs for the poor discourage low income people from accumulating even modest savings and owning a reliable vehicle. Middle class programs such as financial aid for students mean, for example, that depending on your income and assets, it can make perfect economic sense for you to take an expensive vacation or have cosmetic surgery shortly before your child applies for college.
Means-tested Social Security and/or Medicare may well discourage work and savings. What’s even more discouraging is the uncertainty resulting from the Democrats’ refusal to discuss any serious reform. Today’s young people know that means-testing is likely in the future, but they have no idea what shape it may take and whether (and how much) they will be penalized for getting more education, working harder, moving to parts of the country where incomes are higher, saving and investing significant portions of their earnings etc. Piling extra taxes on work and investment on top of that uncertainty is a terrible idea.
On a different note, why do Republicans let Obama get away with rhetorical murder? He keeps talking about not extending some of the tax cuts when what he really means is raising taxes. Prior history of the tax rates is irrelevant. The Bush tax cuts can be just as accurately called “partial rollbacks of Clinton tax hikes”. Or even “partial rollbacks of Clinton tax hikes on top of Bush (H.W.) tax hikes”. Well, you can go all the way to Woodrow Wilson if you are so inclined. But what really matters is here and now. Republicans should never have demanded to “make the Bush tax cuts permanent”. Rather they should have fought to “prevent tax increases in a bad recession”. For all practical purposes the Bush tax cuts are permanent. Yes, I know they were set to expire at the end of last year. But there’s nothing permanent in politics anyway.
And even if they do finally expire at the end of next year (this is not a foregone conclusion yet), the income tax rate structure created by George W. Bush will have lasted a full decade (2003 – 2012). In the entire history of the U.S. income tax there’s never been a longer period during which rates remained unchanged. Republicans unnecessarily ceded a lot of rhetorical ground to Democrats by treating the current tax rates as temporary and unnaturally low rather than referring to them as “current longstanding tax rates”.