Obama should raise taxes on the middle class
It won’t be easy for President Obama to do big things in his second term, with Congress still divided. Yet one legacy-caliber goal is easily within reach: Obama can restore fiscal balance without deep spending cuts by doing, well, nothing. By simply letting the Bush tax cuts expire at the end of this year, for everyone, and vetoing all future tax cuts, the president would leave office in four years with America’s fiscal house largely in order while ensuring a strong federal government for years to come.
Economists predict that allowing the U.S. to go over the “fiscal cliff” would produce a mild recession, and they are probably right. But with signs pointing to a slow yet steady recovery, that downturn would likely be short-lived and worth the longer term gain of achieving fiscal stability without taking a meat clever to key government programs.
Obama promised on the campaign trail that he wouldn’t raise taxes on the middle class and implied that repealing the Bush tax cuts for the wealthy would yield enough revenue. In fact, more than three-quarters of all revenue lost by the U.S. Treasury because of the Bush tax cuts is due to cuts that benefit households making under $250,000, according to the Congressional Budget Office. Simple math suggests that as long as the vast majority of earners are paying the lowest tax rates in half a century, it will be hard to tame the deficit without deep spending cuts.
Forcing such spending reductions, of course, was a key goal of the Bush tax cuts – which stand as the crown jewel accomplishment of small-government conservatives over the past two decades. If Obama lets the bulk of these tax cuts stand in his second term, he will grant a permanent victory to that movement and its agenda of steadily downsizing a range of federal programs.
To be sure, middle-class families are struggling, and higher taxes would be painful. Yet those Americans further down the economic ladder – the bottom 30 percent of households – are hurting far worse. If taxes on the middle class don’t go up, government spending for this group will face an unprecedented squeeze.
Amid all the focus on the “1 percent,” it has been easy to forget that the middle class and the poor compete for resources. Taxes paid by middle-class households make up the bulk of federal revenues that, in turn, fund programs like Medicaid, food stamps, housing assistance and Pell grants. Only by running large deficits has the United States has been able to maintain a strong safety net and historically low taxes on the middle class.
This situation can’t go on forever; the trade-offs will only get harder as the population ages and more low-income seniors need assistance. Robert Greenstein of the Center for Budget and Policy Priorities has estimated that revenue as a share of GDP needs to be 23 percent to 25 percent in future years to maintain current domestic programs – a goal that is impossible to achieve without repealing the Bush tax cuts in their entirety.
Democrats have been remarkably silent on these facts of fiscal life. They have embraced hiking taxes on the rich – and the rich alone – with such fervor that they have ignored how this would, over time, translate into a historic defeat for the progressive project of compassionate government.
Letting the Bush tax cuts expire would avoid such a defeat while setting the stage for a major victory over large-scale deficits. According to the Congressional Budget Office, ending the Bush tax cuts would raise over $4 trillion in revenue over the next decade – as much deficit reduction as was on the table during “grand bargain” negotiations last year or as was proposed by the Simpson-Bowles Commission – but without a cent in spending cuts.
The possibility that tax hikes would trigger a recession is no small thing, even if the downturn is short-lived. Yet bear in mind that a new era of fiscal austerity would not only downsize the safety net but would also reduce key government investments that foster long-term prosperity – in education, scientific research and infrastructure. Indeed, thanks to sequestration, such investments are already on the chopping block for next year.
Getting a handle on the U.S.’s budget challenges is a Herculean task given that anti-tax ideologues hold sway in Congress and surveys show that majorities of the American public disapprove of nearly all options for reducing the deficit. And therein lies the beauty of the situation President Obama confronts: With the Bush tax cuts expiring by law, he doesn’t need to convince anyone of anything, or win a single vote in Congress, to radically decrease the deficit while preserving a strong government.
All he needs is a veto pen.
PHOTO: U.S. President Barack Obama speaks during his election night victory rally in Chicago, November 7, 2012. REUTERS/Jason Reed