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Obama must prepare the United States now for the tax pain to come

From Wednesday's Globe and Mail

Barack Obama delivered yesterday a major speech on his economic plan so masterful that it silences reasoned dissent on his administration's progress thus far.

Yet there was a flaw, imbedded in the second half of his address, that could plague his second term.

Yes, it is beyond hubris to be talking about a second term 12 weeks into the first one. But the President is sowing policy seeds that will not bear fruit for a decade. By his own admission, mistakes made now will matter for years to come.

And political necessity is forcing Mr. Obama to make one very large mistake: He is failing to warn Americans that he will have to raise taxes once this recession ends. That failure could cost him dearly down the road.

"This is going to be prose and not poetry," Mr. Obama warned an enthusiastic crowd at Georgetown University, but it was mighty fine prose - a simple but powerful explanation of how irresponsibility among mortgage buyers and lenders created the mirage prosperity that, when it vanished, left the financial sector and then the economy on the brink of collapse.

But the Obama administration's economic stimulus package has cushioned the impact of the recession through stimulus spending, while the government unfreezes credit and rescues endangered banks.

The President convincingly defended his Goldilocks approach to relieving banks of their so-called toxic assets by explaining the consequences of doing too little - letting the banks fail, which would turn recession into depression - or too much - nationalizing them, which would frighten markets and depress consumer confidence.

"Governments should practise the same principle as doctors: First, do no harm," Mr. Obama said. "So rest assured, we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy."

With reasoning this powerful, the President's critics on the right are reduced to using words such as "socialism" and "fascism," which means they have nothing to say.

The President was much shakier, however, in his prescription for going forward. Absolutely the United States needs regulatory reform, absolutely it needs to reform health care and education, while moving from laggard to leader in alternative energy.

And Mr. Obama was right to emphasize that "the final pillar in building our new foundation is restoring fiscal discipline once this economy recovers."

For the President, that means trimming spending and getting serious about entitlement reform: medicare and pensions.

This is correct as far as it goes. But taxes must also increase or the deficits will continue and ultimately worsen.

The United States is the only advanced economy without a national sales tax. Income and corporate taxes are actually not that much lower than in Europe or Canada, once state and city income taxes are added, especially if employee health-care premiums are factored in.

If the United States is to eliminate its structural deficit, then the most sensible path to follow is to introduce an equivalent to the GST. But there is no political will for such a tax here. Mr. Obama needs to start laying the groundwork for tax increases now. Instead, he offers only vague promises of entitlement reform.

Presidents who get a second term invariably have a bad one. (Korea. Sputnik and the U2 affair. Watergate. Iran-Contra. Lewinsky. Katrina and Iraq.)

If Mr. Obama is re-elected, his second term could well look something like this: Buoyed by a renewed mandate and a strengthening economy, Mr. Obama proposes broad-based tax reform: simplifying the code, eliminating loopholes and modestly increasing rates. The public howls, congressional Democrats rebel, Republicans surge in popularity, the plan dies on the Senate floor and Mr. Obama ends his presidency glumly contemplating his failures. Great first term; second term, not so much.

If Mr. Obama is to avoid that fate, he must prepare the country now for the pain to come. The deficit is well beyond a trillion dollars. Even half that is hundreds of billions too much. Supply-side solutions have been discredited. Either tax hikes are coming or the national debt is going to reach crisis levels. Even the finest Obama oratory can't change this truth.

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