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'Journal Editorial Report,' April 10, 2010

This is a rush transcript from "The Journal Editorial Report," April 10, 2010. This copy may not be in its final form and may be updated.

STUART VARNEY, GUEST HOST (voice-over): This week on "The Journal Editorial Report," millions of Americans rush to finish their taxes ahead of Wednesday's deadline. But if you think you're paying too much now, just wait until next year. Taxes are going up, and not just for the rich.

Plus, America's second-largest city on the verge of bankruptcy, and Los Angeles is not alone. The growing public pension crisis that threatens to sink cities and states across the country.

And President Obama's disarmament dream. Is his new nuclear doctrine a solid strategy or wishful thinking?

(on camera): Welcome to "The Journal Editorial Report." I'm Stuart Varney, in this week for Paul Gigot.

Are you spending the weekend finishing up your taxes? With April 15 fast approaching, millions of Americans are. And if you think you're paying a lot now, just wait until next year. Taxes are going up, but just not for the rich.

Here with a primer on the coming increases, the Wall Street Journal's very own tax team: columnist and deputy editor Dan Henninger, columnist Mary Anastasia O'Grady, assistant editorial page editor James Freeman and, in Washington, senior economics writer Steve Moore.

Steve, I'm going to start with you. Which taxes are going up January the 1st, and who pays them?

STEVE MOORE, SENIOR ECONOMICS WRITER: Hey, Stuart. Well, I have to confess I'm one of these procrastinators. I still haven't done my taxes yet. But, you know, if you think it's bad this year, you're right. It's going to get a whole lot worse next year because the Bush tax cuts expire. That means that we're going to see an increase in the capital gains tax. We're going to see an increase in the tax on dividends, perhaps a doubling or tripling of that tax. And then we're also talking about higher income tax rates next year. So this is going to be a tough year this year, but I think things get a whole lot worse next year as we see rates across the board increase. And let's not forget, there's also a lot of talk about a value-added tax on top of all of that.

VARNEY: Yeah, well, these taxes that you mention, Steve, are they going to bring in the required amount of revenue to the Treasury?

MOORE: Oh, of course, not. As you know, Stuart, there's something called the Laffer curve, and that's especially true with these investment taxes. I think it's a big mistake to be raising taxes on stocks and investment at the very time we need businesses to be doing more investment. So a lot of economists think we're going to have a pretty good year this year, in 2010, but once those new taxes kick in, in 2011, might cause a double-dip recession.

VARNEY: Dan?

DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Well, we didn't even talk about the taxes that have been embedded in the new health-care plan, the Medicare tax, 2.9 percent, has been extended to dividends and capital gains. And on people — individuals making over $200,000, couples over $250,000—there's a surtax of 3.8 percent. All of this to pay for the trillion-dollar health-care plan. But this is over 10 years. The idea that you are going to be able to tax only the quote-unquote "rich," who make more than $200,000, for 10 years, to accumulate enough revenue to pay for what is undoubtedly a health-care plan whose costs have been underestimated, is simply a pipe dream. I think most people in this country understand that the middle class has to participate if you're going to generate enough revenue to support government, and they simply, because of Obama's promise, will not touch that third rail.

VARNEY: But that is a consumption tax, this value-added tax. That's what we're talking about. That's the subliminal message here, isn't it? It's coming, isn't it?

HENNINGER: Well, presumably the deficit commission will put it on the table, but the American people have to decide whether they want that on top of the income-tax system they already have.

VARNEY: James?

JAMES FREEMAN, ASSISTANT EDITORIAL PAGE EDITOR: Well, I just think that you look at the Obama spending plan, and it looks like we're headed toward a VAT required to pay for all of this spending.

VARNEY: Sure.

FREEMAN: But to strike a little, maybe optimistic note here, I don't think we're destined to higher taxes, because I think Mr. Obama is going to have a problem if the spending splurge continues and we get to the point where he's got to put in a VAT, where we've got to absorb all these new investor taxes, and we're still hanging around at nine percent or 10 percent or eight percent unemployment. That is going to be politically dangerous. And so I think you have a possibility that this could be — this could be reversed.

VARNEY: Mary, are you going to get really radical and suggest — what?

(LAUGHTER)

MARY ANASTASIA O'GRADY, COLUMNIST: Well, you know, there is always the possibility of making the federal government smaller. And unfortunately, we don't have many politicians who are thinking that way. Even politicians, Republicans, are talking about, you know, which limb we're going to hand over to pay for this. And that they don't talk about cuts in federal spending that are possible, including lots of programs in agriculture, housing, education. You know, a half a trillion dollars in the federal budget goes to nondefense discretionary spending.

VARNEY: But if you cut — you know, no politician is going to allow all of that spending just to be cut. It's not going to happen.

O'GRADY: Well, I mean, going back to what James said, you know when the American people start to look at the numbers and start to look at a big VAT tax on top of the taxes that they're already paying the federal government every year on April 15, I think that there is room for a leader, some leadership to come along and say, "Look, here are the numbers, here is the waste. Let's talk about cutting the size of the federal government."

VARNEY: Steve, will it happen?

MOORE: Well, I sure hope so. And by the way, Mary, a great way to start with what you're talking about — you know, there's $500 billion of the stimulus bill that still hasn't been spent. Let's save $500 billion by just not spending money on a program that hasn't created jobs.

But I want to go back, if I may, Stuart, to this idea that Dan was talking about, about the value-added tax. It's important for our viewers to understand who pays that tax. That is a tax directly aimed at the middle class. It is a sales tax, essentially, that you pay at the cash register. You know, and the next time you buy your new iPad, Stuart, it means that rather than paying $700, it's going to cost nearly $800. I mean, these are big increases in costs to the middle class at a time they're having a tough time paying their bills already.

VARNEY: Yeah, so here's the likely scenario. The deficit reduction commission recommends a sales tax, a value-added tax. But it still has to go to a vote in the Congress.

Dan, James, you don't think it would pass in the Congress? No?

FREEMAN: No. I mean, you know, here we are in — like I said, we're still over nine percent unemployment. I mean, where is the job creation? We're not seeing the job creation we typically get from the venture capital industry, for example. We're not seeing those young companies that we rely on to create innovative technologies. And I think when we're saying our economy isn't working, the job machine is not restarting, and we're going to raise taxes, that's — politically, that's going to be very tough.

VARNEY: But then you are left with a tax on the rich, Dan, which doesn't bring in anywhere near enough money to pay for the entitlements that we've got going for us.

HENNINGER: Well, Stuart, I look forward to the debate on the value-added tax if we get to that, because it does raise the question which people have been asking: What kind of country do we want? Do we want a country that becomes as big as the governments of Europe and simply resign ourselves to paying taxes at that level in perpetuity?

VARNEY: That's what we've got.

HENNINGER: That's the debate we have to have on the floor of the Congress.

VARNEY: That's what we've got, Dan. Isn't that what we've got?

HENNINGER: We aren't there yet. But that's the question. Do we want to go there?

VARNEY: OK.

Still ahead, America's second-largest city on the verge of bankruptcy, and Los Angeles is not alone. When we come back, the growing public pension crisis that's threatening to sink cities and states across the country.

(COMMERCIAL BREAK)

VARNEY: Well, it's a crisis that threatens to bankrupt cities and states across the country. I'm talking about the massive shortfalls in public employee pension funds. In California alone, a report out this week shows that the three biggest state worker pensions are underfunded to the tune of a half trillion dollars. And the Los Angeles controller says that city could go bankrupt in four weeks, thanks in part to bloated pensions of retired city workers.

Steve, let's start with you again. How bad is this?

MOORE: Look, Stuart, this is the biggest scandal and scam in America today in public finance, these outrageously generous pension plans for public employees. It's happening all over the country. You were centering in on Los Angeles, which is ground zero for this crisis. And you're right. A lot of these cities in Los Angeles and in California and all over the country are really facing this crisis. You've got a situation right now where many of the public employees who are retired now are collecting 70, 80, $90,000 a year checks. Some are getting over $100,000. And it's not fair, Stuart, for $50,000 to $60,000 a year construction workers or people working in the private sector who are earning much less, who are having to pay these massive pensions for people who aren't even working any longer.

VARNEY: By the way, Dan, there are 3,000 retired teachers in California each of whom makes over $100,000 a year in pension. So my question is: Who did this?

HENNINGER: Well, the politicians basically did it. You know, public employees were allowed to unionize back in the 1960s and 1970s after President Kennedy issued an executive order enabling the unionization of federal workers. And since then, the Democratic Party, basically to buy labor peace, to gain the political support of unions — which, after all, do spend money in political campaigns — have simply opened the door to these labor agreements, early retirement, significant wage increases. And now it has accumulated until it's time to pay the piper, and the citizens in places like California and New York are going: "Where did this come from?"

VARNEY: Yeah, so what are the solutions? I put it to you. A city could go bankrupt, like Los Angeles, a state can default on its obligations, and the two of them can have their finances worked out by an outside authority. Or you can get a federal bailout. What's coming, Jim?

FREEMAN: Well, the federal bailout would only happen because the U.S. Treasury can make money. A lot of these states that would get a bailout are actually not in as bad shape as the United States government. But since the federal government can print dollars, there's going to be a temptation to ship it out. But I don't think that's going to happen. I think Americans are tired of bailouts. Bankruptcy does allow the cities and states to work these problems out.

And even on a state level — California, the bondholders get paid; education mandates have to be paid; pensions wait in line with everybody else under the laws of that state. In almost every state, these pensions are not guaranteed under the state constitution. They've had favorable court decisions, but these things can be worked out. And step one: More than 80 percent of state government workers get defined benefit pension plans. Shift them over to defined contributions like most private-sector workers have now with 401(k)s. That's step one.

VARNEY: But that's for workers in the future. That's for new hires.

FREEMAN: Right.

VARNEY: That solves the future.

FREEMAN: That solves the future. And for people now in the system, Social Security — every once in a while the politicians adjust the retirement age; they adjust the benefits. Why not with these pensions, which are more generous than with what the taxpayers get who are supporting them?

VARNEY: And yet again, Mary is itching to be radical and say —

O'GRADY: No, it's not true, Stuart. I'm not going to say cut spending, because in this case, the problem is really this pension structure. And there's nothing that states can do, really. If they start cutting services, which is, you know, roads and bridges, that's not going to help the state. I don't think there's anything states can do short of going after the structure of these pension systems. I mean, Arnold Schwarzenegger said just last week that the unfunded status of California's public pensions is six times the state's budget. I mean, that's — there's nothing they can do but —

VARNEY: Isn't it written into the — some states, I don't know about California — it's written into some states' constitutions that those pension obligations must be met.

O'GRADY: Well, that's a particular problem in New York. But in most the other states, there are things that can be done. And on top of that, I mean, if you have — in California, anyway, you have a rule that says that the—that any debt that the state takes on has to be approved by voters. So if you have a big unfunded liability, you're already contravening the state constitution. So they have to face that, and I think they're just going to have to force state workers to start to accept benefits that are closer to what the private sector —

MOORE: And Stuart —

VARNEY: Steve?

MOORE: Another thing these states need to do is raise the retirement age. You've got situations in states like Ohio, where teachers who are making $100,000 a year can retire at age 54, and they can be rehired — they call it "retire and rehire" — at the same job, so they collect a $100,000 paycheck at the same time they're collecting an $80,000 pension. This is bankrupting states. They have to do two things. They have to cut pay, and they have to have reductions in force, because the only people who haven't had pay reductions in this recession have been the public employees.

VARNEY: You're right. Dan, last word to you. It looks to me like bankruptcy for a city, default for a state, reorganize. That looks like the best option.

HENNINGER: Well, something like that would be true in states like California and New York. But you know, we talked a little bit about federalizing this problem. There are states like Texas, Nebraska, Minnesota, who do not have this problem. They have two senators in that Senate, and they will fight to have this problem — against this problem being federalized.

VARNEY: What a problem.

When we come back, President Obama's disarmament dream. Is his new nuclear arms policy a solid strategy or just wishful thinking?

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: More and more countries will come to recognize that the most important factors in providing security and peace to their citizens will depend on their economic growth, will depend on their capacity of the international community to resolve conflicts, it will depend on having a strong conventional military that can protect a nation's borders, and that nuclear weapons increasingly in an interdependent world will make less and less sense as the cornerstone of security policy.

(END VIDEO CLIP)

VARNEY: Finally this week, dreams of disarmament. That was President Obama in Prague Thursday after signing an arms-control treaty with Russia, which will reduce the U.S. nuclear arsenal by 30 percent. That followed the administration's release of its nuclear posture review earlier in the week, which limits the circumstances under which the United States would use nuclear weapons.

Next week, the president will host a 47-nation summit on nuclear security. And next month, it's on to the U.N. conference on the Nuclear Nonproliferation Treaty. But will the president's plans for diplomacy put us at risk? Wall Street Journal editorial board member Matt Kaminski joins us with more. Will it put us at risk?

MATT KAMINSKI, EDITORIAL BOARD MEMBER: Well, I don't think necessarily. I mean, if generals fight the last war, in many ways what you saw this week in Prague was President Obama fighting several wars back. You know, this obviously brings back images of the Cold War, where America and Russia sat down to try and make the world a safer place by reducing nuclear weapons. And if you believe that American nuclear weapons are what's threatening the world today, then they have actually made a step forward in Prague.

VARNEY: But does it put us at risk if we're reducing our nuclear arsenal—and there are changes to the missile defense system, I believe? That's going to put us in a status quo situation. In your judgment, Matt, are we at greater risk?

KAMINSKI: I mean, I think this is actually a very modest treaty, and the great pretense of the Prague summit was it actually was something important. This treaty could have been renewed last year without any of this. The reductions that are being put in place — the Russians are already well below the numbers, because their nuclear arsenal has been rusting away for the last 20 years. For us, this only concerns a very small part of our nuclear arsenal. The Senate has to go over, I think very carefully, the language on missile defense and, you know, the specifics. At best it does no harm, but we'll see in the next few months what the Senate decides.

VARNEY: Dan, in the broader picture, what does it do for our relationship with Russia? I'm really asking: What did we give up?

HENNINGER: Well, we did—the issue is that we've made this commitment to enhance the so-called reset with Russia. And beyond that, as the president keeps saying, the point of doing nuclear arms reduction is to send a signal to our adversaries — Iran and North Korea — that we are going in this direction, and if we show our good faith, they presumably will come to the table and at least discuss reducing their own nuclear ambitions.

You know, this is a very unique development in American diplomacy. Usually, you achieve commitments from the other side before you make those kinds of commitments on substantive things, like nuclear arms. This is a very hopeful kind of diplomacy that the president is engaged in. Now, let me give you a specific. When the president talked to President Medvedev in Russia, and the idea was that we would get a Security Council resolution on Iran, Medvedev told him there would be no gasoline sanctions in that resolution, because Russia opposes doing that to the Iranian people. What in the name of heaven, then, are we going to do in the United Nations if we've taken even that off the table?

VARNEY: Is it naive? Has the president been naive in adopting this new posture with nuclear armaments?

KAMINSKI: Well, I think he's consistent with actually what the arms-control community has thought for the last 30 years, that it's our fault, and if we make the first gesture, others will follow. Real-life experience over the last 20 years has shown the opposite — that as we and the Russians have drawn down nuclear numbers, many other countries are proliferating. It's a bit like the sort of orchestra playing on the nuclear Titanic. We should be concerned about this new multipolar nuclear world that's emerging rather than striking deals with the has-been power.

VARNEY: Right. It's a treaty. I believe it requires 67 votes in the Senate for passage.

HENNINGER: Right.

VARNEY: Will it get them?

HENNINGER: Well, that remains to be seen, Stuart. There was a time when there was a Soviet Union, and we were doing nuclear arms reduction and treaties with them. They would go through the Senate and you would have on the Democratic side, senators like Sam Nunn, who took on the responsibility of holding the government's feet to the fire and making sure they weren't giving too much away. I don't see anyone on the Democratic side — there are no Sam Nunns in the Democratic Senate anymore. Most of them have been, you know, part of the arms control theology. It remains to be seen whether the Senate will perform its traditional function in scrutinizing the treaty.

VARNEY: Five seconds, last word.

KAMINSKI: I think the bigger question is—you know, President Obama clearly prefers disarmament over modernizing our military. Is—I mean, is that going to weaken American security over the long term? That's the question for the senators.

VARNEY: All right. We have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

VARNEY: It's time now for "Hits and Misses" of the week. James, first to you.

FREEMAN: Stuart, this is a big miss for the Department of Labor, which is now cracking down on unpaid internships, saying that they violate minimum-wage laws. Keep in mind, young people in the country have an unemployment rate of around 20 percent. I mean, it's an absolute depression for that sector of the economy. So why the government wants to cut off job opportunities for this—these young people, is just beyond me.

VARNEY: Because they're wicked capitalists exploiting young people. Mary, now to you.

O'GRADY: This is a miss in the scary technology department. Intel this week unveiled a project they're working on that, if successful, will allow their little machine to read your mind. You're in trouble, Stuart.

VARNEY: Frightening.

O'GRADY: This is truly frightening. We can be comforted by the fact that it's only in the earliest stages, and right now, it just sort of tells — it can tell between which two words you're thinking of. They say that it's going to help severely disabled people communicate, but I think that can it be used in other ways, and none of them are particularly appealing to me.

VARNEY: The assumption is that there's something in there. Matt?

KAMINSKI: Stuart, as President Obama was meeting the Russian president in Prague, back in Moscow, the Kremlin was cracking down on political freedoms again. This time it was using the excuse of last week's terrorist bombing in the Moscow subway to threaten the few free independent media outlets left. And this happened last time in 2004, and I'm afraid: Here we go again.

VARNEY: That's not good, Matt. All right, Steve?

MOORE: My alma mater, the University of Illinois, this week gave a leadership award to Rafael Correa, the president of Ecuador. This is a bad, bad man, Stuart. He has nationalized industries, 50 percent underemployment in the country. He is hostile to America, has all sorts of alliances with people like Fidel Castro, in Cuba. You know, the University of Illinois says that University of Illinois students should be inspired by Mr. Correa. God forbid.

VARNEY: Well said, Steve. Thank you very much, one and all.

That's it for this week's edition to "The Journal Editorial Report." Thanks to my panel and to all of you for watching. I'm Stuart Varney. Paul is back next week. We hope to see you then.

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