Middle-class tax hike in Obama's future: James Pethokoukis

-- James Pethokoukis is a Reuters columnist. The views expressed are his own.

By James Pethokoukis

WASHINGTON (Reuters) - It was 25 years ago this summer that Democratic presidential candidate Walter Mondale self-immolated at his party's national convention by guaranteeing he would raise taxes if elected.

("Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did.")

Lesson learned. Since then, Democrats have avoided making such declarative statements on taxes. President Obama is no different.

When economic adviser Larry Summers and Treasury Secretary Tim Geithner seemed to leave the door open to new middle-class taxes in recent interviews, the White House sprinted to shut it.

"I am reiterating the president's clear commitment in the clearest terms possible that he's not raising taxes on those who make less than $250,000 a year," Press Secretary Robert Gibbs said.

But the door is unlikely to remain closed forever. It's economic gospel among center-left wonks (the kind of folks who give Team Obama policy advice) that structural government spending as a percentage of GDP is headed sharply higher over the long term because of entitlements -- and there's little that can be done about it.

The ratio has been around 20 percent or so the past few decades, and number crunchers forecast a sharp rise to 25 percent (best case scenario if healthcare is successfully fixed) to 30 percent (worst case) of GDP over the next few decades.

Tax revenues typically hover around 18 percent of GDP. That gap -- representing $500 billion to $1 trillion a year -- will need to be closed or else cause economic chaos in the currency and bond markets.

The possible answers: a) less spending, b) higher tax revenues from dramatically higher growth, or c) higher tax revenues from higher rates on the non-wealthy.

Oh, and the wonks are convinced "a" is a political impossibility and "b" an economic one.

Now Obama and his advisers, as those hints from Summers and Geithner reveal, surely know the budget math doesn't work long term without higher taxes on pretty much everyone.

And Obama has already taken a stab at broad-based revenue raisers by attempting to auction off carbon emission permits (with the costs passed down to consumers) as part of a cap-and-trade environmental plan.

That dough could have helped pay for healthcare reform but Congress decided to give away the allowances for a period of time.

But Obama will try again. Cold, unforgiving financial logic will force an eventual embrace -- particularly if he's reelected -- of higher, European-style taxes, like a value-added tax.

To paraphrase Mondale, Obama will raise middle-class taxes. He won't tell you (yet). I just did.

(Editing by Martin Langfield)