Obama should raise taxes on the middle class

By David Callahan
November 8, 2012

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

34 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Since you are writing an in depth article about economics — my favorite subject — let’s see what qualifications you really have to express a knowledgeable opinion.

From Wikipedia:

David Callahan is a co-founder of the think tank Demos, a public policy group based in New York City, where he is currently a Senior Fellow. He is also an author, commentator, and lecturer. He is perhaps best known as the author of the books The Cheating Culture and The Moral Center.

Callahan is a graduate of Hampshire College and holds a PhD in Politics from Princeton University.

———————————–

What this says to me is you are from a privileged background which helped to leverage you into positions you would not otherwise have access to, are extremely opinionated without any reason for such hubris, and a professional lobbyist.

WOW!

I’m deeply impressed.

(by your total ignorance of the subject of economics)

Posted by PseudoTurtle | Report as abusive

Capital gain for investment longer than 5 years should be at 5%. Otherwise we are just taxing inflation. And 15% should be the maximum after 2 years. OK 20% for assets kept just over one year.

This could be a good compromise to keep, for example, the real estate recovering.

Posted by robb1 | Report as abusive

To some extent, your middle class tax has and is being implemented via the alternative minimum tax, which long ago exceeded its intended reach, for those in high cost of living areas. The discrepancies in tax rates are directly related to increasing inequalities throughout American society which are tending towards a feudalist society.

Posted by Greenspan2 | Report as abusive

Ok, the working class spending is 70% of the economy. Wages(our standard of living) has been forced down(in real money)since the sixties(experts agree). Now lets extrapolate from these widely reported figures and facts. The economy in the tank because the 1% sent it there by lowering wages to compete in the world economy. i.e. replacing the American spender with emerging country spender.
Where would the entitlement programs be today if we had a modest pay increase per yr. across the last 50 yrs. if the gov. had been able to collect the taxes on those loss wages?
So my point is, this is all orchestrated, this whole problem was brought about by programs to to lower the standard of living in America.

Posted by riversouth | Report as abusive

Callahan’s support for his silly and sophomoric thesis follows the illogic of supposing that if you want to increase tax revenue, just identify the largest class of people (poor and to the medium-stressed level of middle class) and raise their taxes. Simple: largest group of people taxed more means largest tax revenue. Never mind Willie Sutton’s opinion that to get money, go to where the money is.

Posted by bcrawf | Report as abusive

Oh, I like this one.

Obama doesn’t have to get approval from Boehner on this. Just let them expire and go over the “fiscal cliff”.

Too funny.

I hear he’s going to make a speech on this soon. It will be interesting to hear.

He can call Boehner’s bluff now.

rotflol

Posted by LoveJoyOne | Report as abusive

Nearly credible.. nice try.

Posted by Mott | Report as abusive

The hidden agenda – if the US raises taxes on the middle class, they can raise taxes less on the rich and let them keep a lot of their deductions which will not be affected.
Callahan, we are not stupid.

Posted by americanguy | Report as abusive

If a person really feels as though he hasn’t had enough stolen from him in the forced payment of taxes, there is nothing preventing that person from overpaying to his hearts content. Where I take offense is when that person decides his guilt should include me. If a thing, even protection, is truly necessary then it will be supported through voluntary contribution of time or money. Everything else is theft no matter how much sweetener you dump on it.

Posted by LysanderTucker | Report as abusive

I had a reply for robb1, but Reuters editors have cut me off and my reply simply disappeared into cyberspace.

So much for free speech in this country.

Posted by Gordon2352 | Report as abusive

PseudoTurtle-

Brevity? Just sayin. You might have a worthwhile in there somewhere, but who would know given the size of that tome you wrote.

Posted by jambrytay | Report as abusive

@ jambrytay –

I am both Gordon2342 and PseudoTurtle, depending on which PC I am using.

Posted by Gordon2352 | Report as abusive

@ jambrytay –

Yes, I know Gordon2342 is a typo, and it should read Gordon2352.

I don’t want to confuse you any more than you already are, if that is possible.

Posted by Gordon2352 | Report as abusive

Gordon2352-

People are obviously free to write whatever they want.

It’s my humble opinion that in a forum like this, 4400+ words is a bit excessive when the original article was under 800 words.

Sorry, I’ll go back to my copy of Hop on Pop now.

Posted by jambrytay | Report as abusive

Anyone Remember Bidens Website “For a Strong Middle Class”….Whata Farce!

Posted by ineeditbad | Report as abusive

I think the author’s thesis is a good one and quite valid. Obama has to do exactly nothing in order to have the government collect more revenue, and I think Boehner and the House of Representatives is going to help Obama to do just that. There just aren’t enough “rich people” to make that much of a difference in revenue collection, no matter how much their tax rates are increased.

I had to chuckle whenever I heard the OWS crowd rant about being “the 99%” against the reviled “1%.” If one applies worldwide standards, the vast majority of those 99%ers would in fact be in the top 1% of the world’s population. I wonder how they’d feel if the rest of the world came after *them*?

Posted by Randy549 | Report as abusive

Wow that was quick. Thanks all you chumps who voted for this disaster.

Posted by thefoundersrock | Report as abusive

Current spending is unsustainable even repealing all the Bush tax cuts. In 2000 with 3.8% unemployment and 4% GDP growth , tax revenues were a post 1945 record of 22% of GDP. That means even with the Clinton economy, given obamas spending those $200b Clinton surpluses would be $450b obama deficits. Just based on higher spending.

If we want even higher taxes we have to tax everyone who works. Liberals love to talk about the 1950s tax code that taxed the rich at 91% marginal rates. What they forget is the bottom rate was 10% on the very first dollar of income earned.

Posted by ekaneti | Report as abusive

Letting the top rate go back to 39.6% and keep the rest of the Bush tax cuts will finally put an end to the popular fallacy that we have deficits cuz the rich don’t pay enough. Raising rates to 39.6% will bring in at most $70b per year in additional revenue. A drop in the bucket.

Posted by ekaneti | Report as abusive

Ekaneti-

Agreed. For the most part, we’re not in our current fix because we’ve under taxed, we’re here because we’ve over spent. People don’t want to hear that. People are sure we can simply tax those nasty rich people and voila, deficit fixed.

Posted by jambrytay | Report as abusive

@ ekaneti & jambrytay —

You are absolutely correct, in stating that “current spending is unsustainable even repealing all the Bush tax cuts”, but that is because the Bush tax cuts were given gratis on top of decades-worth of wealthy tax cuts ahead of that — not counting all the tax loopholes for corporations and wealthy individuals to hide their money overseas, all legal of course.

Clearly, what is necessary to is restore revenue levels back to a point where the economy will not go over a “fiscal cliff”.

Doing that will buy the US economy time to reduce its spending in a measured and sensible manner.

ANY other solution is guaranteed to throw the economy into a recession, or worse, just to keep the wealthy class living in the style to which they have become accustomed.

Sorry, that simply isn’t good enough of a reason for me to see the US economy go into another Great Depression, or worse.

Posted by Gordon2352 | Report as abusive

Gordon2352-

Really sorry I hurt your feelings.

Posted by jambrytay | Report as abusive

@ jambrytay –

Not at all.

The reason I simply copied what I did is so that I wouldn’t have to keep repeating simple economics to people like you who are incapable of understanding it.

I was merely toying with you, but I am bored with picking the low hanging fruit from the tree of stupidity.

Posted by Gordon2352 | Report as abusive

Gordon-

So if I don’t agree with your position, it’s because I can’t comprehend it? Keep trying to insult me if that’s your game, but I’m standing by my position that says deficit problem #1 is government overspending.

I’m sorry, you should keep right on copying/pasting huge amounts of text that no one will read. Very effective.

Posted by jambrytay | Report as abusive

@ jambrytay –

I really want you to understand, which is why I restated my position, but I can’t seem to get through to you. Thus, my exasperation.

Let’s try another approach.

You state that government overspending is the main reason why we have the deficit problem.

Notice I don’t disagree with you on that point.

But you have to give me more to work with than simply stating the same belief over and over.

Give me details to support your position.

We are currently running over $1 trillion in deficit spending each year.

How would you solve that issue by spending cuts alone — and, most importantly, specifically what “overspending” would you cut — without causing the US economy to collapse?

Posted by Gordon2352 | Report as abusive

I believe we’ve gotten into our current position largely due to govt overspending. Unfortunately, the hole we’ve dug ourselves is now so deep that spending cuts alone probably won’t fix things. The fix is going to have to include spending cuts and, unfortunately, tax increases. Having said that, the ratio will need to be heavier on the cuts on spending v. tax increases.

i’m amused by those who believe tax hikes on the rich is THE answer. As Ekaneti points out, we can raise taxes on the rich, but it won’t help nearly enough. The real solution must include big cuts in govt spending. Problem is, we’ve become Keynesian junkies in recent years, so we can’t cut of the spigot off all at once. Longer term, I hope we get to an economy that’s less Keynesian and more weighted towards the private sector.

I have a plan that I think would help at:

http://unrepentantcapitalist.blogspot.co m/2012/06/problems-problems-problems.htm l

Posted by jambrytay | Report as abusive

@ jambrytay –

Thank you. I read the blog link you included and I now understand your views are basically libertarian.

Although you didn’t specifically answer my question about where you would cut, I assume it would be the existing social programs as quickly as possible, though not as drastically as the eurozone.

I believe a balance of budget cuts and tax hikes are necessary for this country to survive — which is not what you intimated earlier, but a more realistic approach that is much closer to mine — however I think the percentage mix would still be far more than the economy could handle at any reasonable point in the future, because this country is in serious decline, not expanding as is generally believed.

I have some problems with what the article you indicated recommends. For example:

(1) This is not like the 1930s where infrastructure improvement would eventually yield benefits to society because we are no longer expanding. Fixing the current infrastructure that is need of repair is pointless while the economy is in decline, since it will simply add to our cash outflows at a time when we must conserve them.

(2) Granted our government social programs need an overhaul, but from a Republican or Libertarian viewpoint that means reversing the minimal social safety net that is in place now with nothing except a market version of them, which will automatically price most people out of the resources they need to survive. This will create — because of the massive changes in demographics that has occurred since WWII — a highly unstable society that will probably cause the government to collapse. I understand this may be desirable from a libertarian viewpoint, but it is unrealistic because it would mean some type of violent revolution as people begin to lose their life savings and are forced into the streets.

I have indicated what I believe to be an acceptable solution to that problem elsewhere. Basically, (1) remove Social Security from government control because the apparent problems with Social Security are directly related to government mismanagement of the Social Security Trust Fund, (2) remove the cap from Social Security, which would apply the tax (but with no company contribution) equally to all people regardless of income level. This would allow the social programs to function as they were designed (i.e. social insurance). This must be done because insurance of any kind only functions properly if the risk is spread to a broad base. Right now it is not functioning properly because the base only covers those who are virtually 100% guaranteed to need it. That is not insurance by any definition of the word, and is one of the major problems with Social Security right now. The wealthy need to contribute because they do not live in a vacuum. Their money is made from the broader consumer economy, so they should contribute to those who support them. And (3) flexibly adjust the contribution each year to meet the requirements of the social programs so that the revenue supports the outflows in a balanced manner. One of the problems in previous years is that the trust fund was allowed to build a surplus, which was then misused by the government. By automatically adjusting the tax on a regular basis it would prevent any excess buildup.

I understand that libertarians do not want any social programs, but that is extremely unrealistic in modern society which is highly integrated and failure of one part means failure of the whole machine.

(3) The article states “We’re also in desperate need of tax overhaul/simplification”, which is nothing more than a code phrase for reducing taxes for the wealthy class. For example, they advocate a “flat tax” for income, but that works essentially the same as a sales tax which places the major burden of taxation on the poor. A flat tax is a misnomer because it is anything but flat if you do the math on how it affects different income groups. And no amount of adjustment can overcome the basic problem of it being a regressive tax.

(4) Use of the word “capitalist” in the title is disingenuous, since this is not capitalism at all — a point which I have made repeatedly — but a twisted neocon version of it which Adam Smith in the Wealth of Nations (1776) warned against. The fact that this is not capitalism, but a distorted version of it lies at the root of all of our problems. The whole system is skewed towards the wealthy. That is what we must fix.

Roughly since we began trade with China, the wealthy class has managed to dismantle all the safeguards previously in place to protect the economy. These safeguards were placed into law in the aftermath of the 1929 crash, which was caused by the same type of wealthy excess during the 1920s that caused the markets to crash from easy money and speculation.

Adam Smith also said that capitalism without proper safeguards would lead to collusion of the wealthy and undue influence on politics to their advantage.

THIS is really the underlying problem.

To fix this economy we MUST reverse ALL the tax, trade, and banking legislation that has been passed for the past 30 years.

Without correcting the underlying problem, the US economy will crash hard quite soon, probably by next year as things stand right now.

I don’t expect you to reply, since there is a significant gulf between what we both believe. However, you might like to check the following website on progressivism. I dislike any label being applied to me, but my core beliefs are probably closer to this philosophy than anything else.

http://en.wikipedia.org/wiki/Progressivi sm

Have a better one!

Posted by Gordon2352 | Report as abusive

i dont recommend cutting social programs overnight, and I don’t believe social spending should be zero. Longer term, total govt spending should be smaller than it is now. We’ve got to ween ourselves in that direction. I think too many people believe that we can just raise taxes to fix the problem. Lets demonize the rich so we feel justified in taking even more of their money. It feels like we’re drifting in a socialist direction and I don’t believe socialism allows an economy to realize its full potential.

Posted by jambrytay | Report as abusive

i dont recommend cutting social programs overnight, and I don’t believe social spending should be zero. Longer term, total govt spending should be smaller than it is now. We’ve got to ween ourselves in that direction. I think too many people believe that we can just raise taxes to fix the problem. Lets demonize the rich so we feel justified in taking even more of their money. It feels like we’re drifting in a socialist direction and I don’t believe socialism allows an economy to realize its full potential.

Posted by jambrytay | Report as abusive

@Gordon2352: You copied several entire articles that were subject to copyright (there are even ©copyright notices included in some of the texts you snipped!) This would not count as “fair use” — in fact you may give Reuters headaches over legal liability for the copyright infringement, that could ultimately get both your accounts banned under their T’s and C’s.

You may have an MBA and may have some good points, but I think your points may be made more briefly and effectively (and people would pay more attention to you) if you would paste HYPERLINKS instead of entire articles!

Posted by matthewslyman | Report as abusive

> “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.”
— It was inadvisable for Obama to make this promise, although to be fair, Romney would have been forced to abandon some of his own economic promises.

> “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”
— This just isn’t going to happen during Obama’s term, unless there’s a short spurt of MASSIVE economic growth, combined with the political will to effectively raise taxes. With federal revenues at 15%GDP, spending at 25%GDP, and debt at around 105–110%GDP (am I even keeping up with this debt figure?); the only way to arrest the current economic free-fall is to RAISE REVENUE and CUT SPENDING at the same time (somewhat more the former than the latter). Maintaining current domestic programs shouldn’t even be a goal at the moment, because US spending over the last four years has included some wasteful projects that DAMAGED economic growth by diluting & diverting human effort from worthwhile economic activity.

I’ve previously shown by the official economic numbers on record, how increasing revenue by GDP may INCREASE economic growth rather than causing a lasting recession (as you suggest, the result of increased taxation may be a short, somewhat mild recession followed by strong & sustainable growth — the mildness of the recession would depend on the sequence of economic reforms, and where the spending programs were focussed).

Based on my interpretation of the numbers, to attain general financial stability, the US federal budget needs to rebalance within four years at:
21–22% revenue by GDP, (could fall to 20–21% when debt is paid down to 85%GDP)
22–24% spending by GDP,
2–3% annual GDP growth (with long-term planning to build the infrastructure to support that).

Lesson learned: Bush didn’t pay for the wars he started, and his economic reforms didn’t magically get rid of the need to do so (in fact, they made matters worse). The USA needs to dump Norquist’s economic nihilism and enact a smart balanced-budget amendment; which takes account of GDP growth.

The question is, is there the political will to do this? Will Obama do his job this time around, and put the current crisis at the top of his priority list?

Posted by matthewslyman | Report as abusive

@ matthewslyman –

Mr. Sly Man,

You and I both know you are a total fraud, with absolutely no legitimate credentials in terms of education or experience to support ANY of your opinions.

I understand you are angry because I exposed you on your previous comments, but you are not an attorney either, while in addition to my MBA I also attended law school specializing in contract law, which I used in my profession as a Plant Controller and Finance manage for several international high-tech companies.

Clearly, you nothing about copyright law either, and the length of some of your ridiculous articles are no different than my including the text of the article as long as I include the source, which I have been very careful to do.

I don’t answer to you in any way and I suggest you mind your own business, or I will begin to answer some of your ludicrous comments again.

Right now, they are not worth my trouble because I know you are a fraud. The fact that you choose to play the role of charlatan is your business, but I warn you to stay out of mine or I will reciprocate.

Gordon2352

Posted by PseudoTurtle | Report as abusive

@ jambrytay –

You state, “i dont recommend cutting social programs overnight, and I don’t believe social spending should be zero. Longer term, total govt spending should be smaller than it is now. We’ve got to ween ourselves in that direction. I think too many people believe that we can just raise taxes to fix the problem. Lets demonize the rich so we feel justified in taking even more of their money. It feels like we’re drifting in a socialist direction and I don’t believe socialism allows an economy to realize its full potential.”

————————————–

I don’t disagree with what you are saying, only where the cuts need to be made and the fact that taxes will need to be raised substantially to even reach breakeven because we have been on the wrong track economically for 30 years.

Compared to other OECD countries, this country is far from becoming socialist, and we could go a long ways in that direction before it would begin to affect the economy. The European nations were doing just fine until they became infected with neocon capitalism. Now they are in trouble.

Actually, I propose this to you: if we modeled this country on one or more successful European models, why would you object?

If by doing so we would eliminate the employer business taxes in terms of health care, retirement, etc., that are crippling them now wouldn’t that make more sense than this cobbled together system created in the Great Depression that really doesn’t work for anyone?

Wouldn’t that be worth moving towards a more government sponsored social safety net?

The problem is the neocon movement, beginning around the time Reagan was elected, which has morphed into an anti-government movement that refuses to accept responsibility for what they have done in terms of taxes, trade and banking legislation.

Given that the neocon movement is the problem, how would you solve it?

Posted by Gordon2352 | Report as abusive

Okay, I’ll bite. Who do you see as successful in Europe?

Posted by jambrytay | Report as abusive