Are trillions in deficits and/or trillions in tax hikes Mr. Obama’s vision of America’s future?

The national debt reached $11 trillion about eight months ago. It has just reached $12 trillion. Given the projected deficit over this fiscal year, it is possible that the deficit will reach $14 trillion within a year. Under Obama’s spending plans, it is expected to reach $24.5 trillion by the end of the coming decade, more than the annual GDP. That puts the country in failed economy league. And, of course, this does not include government spending from Obama/PelosiCare.

I’m not sure deficits actually will be that high. The projections are based on projections from current expenditures. But some of those, like the Iraq war spending, are likely to decrease, as are various “stimulus” payments. Still, the danger is that Obama’s proposed programs are going to be permanent federal commitments and, therefore, contribute structurally to the deficit. Annual $800 billion deficits, far more than anything George W. Bush had in even one year, are simply unsustainable.

One tactic that appears superficially to be a solution. Let all the Bush tax cuts expire. Some commentators already perceive the administration to be floating trial balloons of this type for a $3 trillion tax hike over ten years. I have been wondering about this for some time. But I think that the timing would be politically risky for Obama. The tax cuts expire at the end of 2010, which would precipitate considerable discussion about the matter shortly before the midterm elections. The Democrats could vote a one-year extension to put the matter over until 2011, but that still would not avoid the acrimony in 2010 entirely. It would also threaten Obama’s 2012 campaign. More likely, the matter would be extended through 2013, although they might be permitted to expire on schedule as to certain higher-income earners. After that, all bets are off, and everyone will be hit hard of the cuts expire, especially if they are not phased in.

Nancy Pelosi and the House Democrats are also looking to impose a huge European-style value-added tax that is hidden in the price of goods. That will make goods much more expensive for Americans even as their wallets are emptied by other higher taxes. Moreover, tax collections never meet government projections, because people change their economic behavior in response to changes in tax laws. Taxes on income and on capital formation (e.g., through taxes on dividends and capital gains) reduce job formation, thereby depressing GDP growth. Economic growth is the only way to provide effectively for tax revenues because rates can be kept low while still producing significant amounts.

Another alternative, actually to reduce government spending, seems not to be on the table.

My prediction: A weak currency, weak job growth, and high taxes. A lost decade or more of growth, with stagflation eroding people’s living standards and depressing American initiative and creativity.