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Lawrence Lindsey: If We Don't Extend Tax Cuts, We're Headed for a Double Dip

I can't say I am surprised that the President's Deficit Panel failed to get enough votes to move its plan forward to Congress.

How could they when one of the biggest price tag items—ObamaCare—couldn't be touched?

Larry Lindsey, President and Chief Executive Officer of The Lindsey Group, explains in today's interview why Obamacare could not be touched. Lindsey was one of the key players behind Bush's $1.35 trillion tax cut plan, calling it an "insurance policy" against an economic downturn.

LL: Why didn't the deficit commission have the political courage to address the costs of ObamaCare?

LLindsey: This is a Presidential Commission and the co-chairs felt that taking on the President’s pet program, that had just recently been enacted, would be inappropriate. But, numbers are numbers and they still had to work around it.

For example, the so-called Doc-Fix was a pay-for for Obamacare that let the President claim that his bill didn’t cost any money. This legislative gimmick basically cut physician payments by 23 percent in the Obamacare bill and then restored them in separate, but parallel, legislation. So, Obamacare could be shown to be “deficit neutral”. Trouble is, the Congress couldn’t get the votes to restore the Doc-Fix in separate legislation, so we have this large dysfunctional hole in the medical payment system that is unsustainable. The Commission makes deep cuts elsewhere in order to cover the Doc-Fix.

Incoming Budget Chair Ryan is voting against the proposal because he feels that the Commission report pays for the deceitful accounting in Obamacare with higher taxes and bigger spending cuts, but leaves the core of the bill unchanged.

There are of course many more ticking time bombs in Obamacare that will have to be fixed. No serious analyst thinks the thing is workable. Just look at the number of special interest waivers that Secretary Sebelius had to issue in the run up to the election to stop large companies from dumping medical care coverage for their workers.

The total is now more than 100.

I think a compromise was possible that acknowledged the truth about Obamacare in the text of the report, but left it to the Congress to make the changes that were needed.

LL: If you were a deficit commission member, would you have voted yes on this?

LLindsey: If I were a member of the Commission, I would have voted for the report but issued a statement on additional changes that were needed.

What is unappreciated is how much the Commission report raised taxes.

Between 2010 and 2015 the tax share of GDP would rise 4.4 percentage points while the spending share would only drop by 2.2 points. This is twice as much tax increase as spending cut, even though the mainstream media reports a three dollars of spending to one dollar of taxes ratio. Moreover, the tax increases at the top are enormous.

The Commission reports that the top one percent will pay eight percent of income more in taxes—not eight percent more taxes—that is like an eight point rise in their average tax rate—or an 18 percent increase in taxes.

The reason that I would have voted for the plan is that I think this is probably the last chance we have to take on the deficit issue in the foreseeable future. What is totally unappreciated is that QE is helping to hold interest rates low. If we do not take advantage of this, and rates rise back to normal levels, the deficit literally increases by hundreds of billions of dollars and makes deficit reduction almost impossible.

The reason that many feel that there is more talk than action is that the nation is deeply divided. The Left wants to take America into a European style social-democratic mode with a sharply higher tax share of GDP, tax rates in excess of fifty percent, government takeover of large sections of the economy and large redistribution programs.

President Obama, Speaker Pelosi, and Majority Leader Reid stated they were proud of the accomplishments of the outgoing Congress. On the other hand, conservatives want to return to the more traditional American system of self-reliance, smaller government, and less regulation. It is hard to reconcile those positions.

LL: If the Bush Tax Cuts are not extended are you afraid we could have a double dip?

LLindsey: The President and Congress have failed to act on this for two years, even though they had large legislative majorities. The country now faces the prospect of a double dip recession if action is not taken, but what they are proposing was clearly defeated by the voters on November 2. In order to prevent a double dip, Congress should pass a simple 2 year extension of the 2010 rules and then immediately begin work on substantive tax reform.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."

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