Thursday, July 14, 2011

Obama's tax strait jacket

Last Sunday, when Chuck Schumer defended Obama by denying that middle class tax hikes were on the table, it occurred to me that Obama has not so much shifted to the right on tax hikes vs. spending cuts as remained where he was in 2008:

That unwillingness to tax "the middle class" is a core precept of Obama's. I recall my disappointment during the 2008 campaign when Obama made it clear that he would seek to roll back the Bush tax cuts only for the wealthiest 2%, which accounts for  I believe a quarter of the revenue forgone by those cuts. You simply cannot get to $2 trillion in additional revenue over ten years without taking it out of "the middle class" so broadly defined -- that is, everyone from the 97th percentile on down.  Even with thoroughgoing tax reform, which lowers rates in exchange for reducing tax expenditures, strictly limiting the most popular tax breaks would probably raise net taxes on more than the top 2% of taxpayers.

The moderate Bipartisan Policy Center's plan, for example, radically restructures the tax code, vastly reducing tax expenditures, taxing all capital gains as ordinary income, flattening income tax rates to 15% and 27% and the corporate rate to 27%, and adding a 6.5% national sales tax; it would raise some $2.2 trillion in new revenue by 2020 but also raise net taxes on every income group but the lowest quintile. Obama has never been willing to do that.

I had assumed, as I think others had, that Obama would use tax restructuring -- lowering rates and closing loopholes -- as cover to raise taxes on at least some people making less than $200k (or families under $250k). No dice, apparently.  The strict line that Obama drew in 2008 limiting the tax hikes he is willing to entertain still stands.

The shift of the goalposts to the right thus predates Obama's presidency. Republicans have shifted them by making the Bush rates the status quo and relentlessly demonizing all tax increases, and Obama's half-acquiescence goes back at least to his candidacy.  Those like David Brooks who charged that Obama was putting his agenda in a tax straitjacket back in 2008 were right -- and he is not using tax reform as a cloak to broaden the tax hike pain.
 This basic fact has dawned on a lot of people this week. Ezra Klein noted yesterday:
But we’ve also learned a lot about President Barack Obama. Take taxes. The prevailing theory has been that the Obama administration would seek the largest tax increases it could plausibly pass. Liberals are now dismayed to learn that that notion is false. Instead, the Obama administration wants to take the tax issue off the table as soon as possible; the president is willing to take much less in revenue in exchange for spending less time arguing about taxes.

There have been signs of this disposition all along. In the 2008 campaign, Obama swore never to raise taxes on families making less than $250,000 (a pledge that he has technically broken several times -- the excise tax on high-value health insurance plans is one instance -- while continuing to repeat it). Then there was the December 2010 tax deal, when the White House extended all the Bush tax cuts in return for additional fiscal stimulus. The economy was weak, White House aides said, so stimulus was more important than revenue. Besides, they argued, it was only a two-year extension. In 2012, the economy would be stronger, and they’d be in a better position to let some of the cuts expire.
 Jonathan Chait, this evening:
Obama's main trap is that he promised not to raise any taxes on income below $250,000 a year. That realistically prohibits the government from raising sufficient revenue to fund its current commitment levels over the long term. It also bars a lot of good tax policy. The tax code is filled with inefficient subsidies that are regressive but still provide some benefit to the middle class. (Think home mortgage deduction.) Because of his 2008 campaign promise, Obama can't close those tax expenditures. He needs Republicans to give him cover. In return for that, he can offer entitlement cuts, which is something Republicans crave but can't get without Democratic cover.
I believe, too, that Obama's deficit reduction plan unveiled in April featured just $1 trillion over 12 years in additional revenue over 12 years, along with some $2 trillion in spending cuts and another trillion in saved interest payment. Ezra Klein says that the grand bargain Obama was negotiating with Boehner had just half the revenue as that proposed in the April plan, but I can't see that. It's true that the April plan spoke favorably of reducing tax expenditures in addition to ending the Bush tax cuts for the wealthiest 2%, but it did not itemize any additional savings from such tax reform, and my impression was that the plan implied that such tax reform would supersede ending the Bush cuts, since it would be predicated on lowering marginal rates while reducing loopholes.  Here is all that the plan outline at has to say about taxes:
Balance Between Spending Cuts and Tax Reform: The President’s framework would seek a balanced approach to bringing down our deficit, with three dollars of spending cuts and interest savings for every one dollar from tax reform that contributes to deficit reduction. This is consistent with the bipartisan Fiscal Commission’s approach....

Shared Sacrifice from All, Including the Most Fortunate Americans: The President believes strongly that, as we make difficult choices to live within our means, we cannot afford to make our deficit problem worse by extending the Bush tax cuts for the wealthiest Americans....

6. Tax Reform
The President is calling on Congress to undertake comprehensive tax reform that produces a system which is fairer, has fewer loopholes, less complexity, and is not rigged in favor of those who can afford lawyers and accountants to game it.

He believes we cannot afford to make our deficit problem worse by extending the Bush tax cuts for the wealthiest Americans.

He also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit. Reform should be designed to ask more of those who can afford it while protecting the middle class and promoting economic growth.

In addition, as he explained in the State of the Union, the President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States. By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit.
Perhaps there is more detail in some other document. On the basis of this outline, however, it seems to me, again, that the relationship between sunsetting the Bush tax cuts for the wealthiest and overhauling the tax code is left ambiguous, and that there's just $1 trillion in revenue over twelve years.

Moreover, whenever Obama does talk about closing tax loopholes, he always, as above, emphasizes doing it for the wealthy and for businesses -- for example, by capping deductions on charitable contributions.  Again, he seems self-limited by that 2008 promise.

1 comment:

  1. And yet he's never limited by all his other campaign promises.

    Face it: he's a right-wing Republican from 1972 or so (I'd say Nixon was centre-right, at the time, and Obama is well to the right of Nixon). Once you accept that all the balanced budget madness, limited tax increases, foreign policy, etc… make tons of sense. Standard pre-Reagan Republican orthodoxy.