Sunday, July 10, 2011

Why the president's grand bargain offer is so conservative

Ever since Obama made it clear that he was engaging with Republicans to strike a multitrillion deficit reduction deal, Democrats have lamented how far the goalposts have been moved to the right.  Why were Democrats not insisting on, say, a 50/50 split between spending cuts and tax hikes? Why was the floated half-loaf deal weighted an apparently 83/17 in favor of cuts, and the more recently proffered grand bargain something like 3-to-1? (Though I wonder whether, as in the president's initial proposal, that is not in fact 2-to-1, with another trillion in savings credited to reduced interest paid on the debt.)

I believe that Chuck Schumer's statement yesterday in response to Boehner's rejection of the grand bargain may contain an explanation that's been hiding in plain sight, per the passage I've bolded below:

The President has called the Republicans' bluff by offering them exactly the type of grand bargain they said they wanted, only to have it rejected. Speaker Boehner had shown in the last week that, if it were up to him alone to decide, the nation would not be risking default to protect the wealthiest two percent of Americans. But in the end, neither the olive branch extended by the President nor the pragmatic streak shown by Speaker Boehner was enough to overcome the far right's obsession with defending tax breaks for millionaires and other special-interest tax loopholes. Some on the Republican side would like to confuse the issue by pretending it was tax hikes on the middle class that they were trying to prevent, but none were ever on the table. This decision to reject the President's offer means as much as a trillion-dollar gulf remains between the two sides on a debt limit deal, and Republicans should be put on notice that no matter how hard they try, their plan to end Medicare as we know it will never fill in that gap.
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.

Kevin Drum has argued repeatedly that Obama is simply more conservative than most Democrats, i.e. more amenable to sweeping spending cuts, more willing to favor deficit reduction over short-term stimulus.   The other side of this coin is that Obama is unwilling to raise as much new revenue as most Democrats believe needs to be raised.

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