At the time of writing, US President Barack Obama was still due to unveil his grand plan to cut the US deficit by $3 trillion over the next decade. His prime weapon in achieving his goals is a tax system overhaul which would finally see the American upper crust pay the same tax rate as wage earners.
As things stand, there is a legal loophole whereby income can be taxed as investments, enjoying a lower tax rate than a traditional wage earner – hardly fair. Mr Obama is not talking about a few millions, he actually plans to raise some $1.5tn.
It is understood that Mr Obama feels he cannot agree to cut some $250 billion in cuts on a health care programme for the elderly. A Whitehouse official told Reuters that “He will veto any bill that takes one dime from the Medicare benefits seniors rely on without asking the wealthiest Americans and biggest corporations to pay their fair share”.
Mr Obama has been releasing bits of information over time, presumably to allow the depth of what he is proposing to sink in, to give ‘advance’ warning, and to perhaps gauge the media’s reactions.
Last Saturday, he said he wanted to introduce a “Buffet Rule”. The proposal Mr Obama is talking about is to make US citizens who earn more than $1 million to pay the same amount of tax as others who earned less. The proposal came about when financier Warren Buffett complained that he and his wealthy peers pay relatively less tax than the people who work for them.
Mr Obama faces and election next year, and must find a way to make the cuts before an automatic mechanism kicks in by November. Meanwhile, the US economy has been more or less stagnant and unemployment is relatively high at 9%. With a credit rating downgrade in its lap, some might wonder what sort of political suicide Mr Obama wants to commit. But the truth is very different.
Ever since Gordon Brown cottoned onto the phrase: “Spend your way out of recession”, it seems that every other country has tried it. Many tried in Europe, but in the end had to resort to borrowing from Brussels, because they ended up spending far too much. Others, like Italy and Spain, teeter on the brink. Greece got a bailout, while promising to implement reforms and austerity measures. Those measures were very slow to come into effect and they have not left the desired results, and that is because there is no binding legislation between the EU and member states.
The US, on the other hand, is a Federation of States which is bound by centralized legislation. In other words, the Federal US Government can pass this raft of measures through and they would kick in nation-wide. Other countries have tried to borrow their way out of it. Others have tried to spend their way out of it. Barack Obama is trying to recoup it in tax – tax collection that is justified. In tackling a legal loophole that has allowed the rich to get richer, while the poor get poorer, Mr Obama might just strike gold.
If the US economy can somehow grow, Mr Obama might get it right in finding an economic solution which will boost his popularity across the middle and working class spectrum, while at the same time reducing the massive deficit which the US has racked up over the years. It is high time that European nations did the same and took the bull by the horns – Ireland, Spain, Portugal, Italy, Greece and France, please take note. Germany can only stretch itself so far and there are worries about its growth.