Obama´s Tax-Cut Plan Could Start a Bidding War
These days, your typical State of the Union speech is part ritual, part laundry list, and part prime-time human-interest drama. Often, the people sitting with the First Lady in the speaker’s gallery are more compelling than the policy proposals contained in the address—which, given the gridlock in the capital, usually come to naught. Last year, there was Cory Remsburg, a young Army sergeant who had undergone a dozen surgeries after a roadside bomb in Iraq left him maimed, voiceless, and partly paralyzed. As Remsburg’s father helped him to his feet to recognize the thunderous applause ringing around the chamber, it was possible to imagine, for a brief moment, that unity and common purpose reigned in the Republic.
On Tuesday night, for once, the policy contents of the speech may well dominate things. Over the weekend, White House aides let it be known that President Obama will propose raising taxes on the very rich, to pay for tax breaks for the middle class. More specifically, he wants to increase the tax rate on capital gains for high earners, from 23.5 per cent to twenty-eight per cent, and he also wants to remove the so-called “step up in basis” loophole, which allows rich families to reduce, often greatly, the amount of taxes they pay on their estates. The money generated by these changes would be used for a variety of purposes, including a modest tax cut for middle-class married couples, an expansion in wage subsidies to low-paid workers, and an expansion of tax credits for students in higher education.
This is a good plan. Explaining the thinking behind it, Dan Pfeiffer, a senior White House official, said on CBS’s “Face the Nation,” “It’s the simple proposition that, now that the economy is in a stronger place than it’s been in a very long time, we need to double down on our efforts to deal with wage stagnation and declining economic mobility.”
Of course, with the Republicans in control of the House and the Senate, the chances of the proposals being enacted anytime soon are practically nil. Speaker John Boehner immediately dismissed them as old-fashioned tax-and-spend liberalism. Since the plan isn’t going anywhere, it’s perhaps tempting to dismiss it as meaningless. But that would be an error. Simply advocating tax cuts for the masses will reshape the politics of the next couple of years, and, particularly, the 2016 Presidential election.
On the Democratic side, Hillary Clinton, assuming she gets the nomination, will come under pressure to match and top the White House proposals. After all, she can hardly run for President while saying that her big idea is to carry out a plan proposed by her predecessor. I would be willing to wager that Clinton, or any other Democratic candidate, will subsume the President’s proposals in a bigger and bolder plan to help the sagging middle class. And there is plenty of room to expand upon Obama’s ideas. In a seventeen-and-a-half-trillion-dollar economy, thirty-two billion dollars a year, on average—which is roughly the sum that tax hikes and a new levy on big banks would raise, according to Obama Administration officials—is a very modest sum. In fact, it’s equivalent to only about a fifth of one per cent of G.D.P. Any Democratic candidate who is flying around the country talking about the need to offset decades of rampant growth in inequality will surely be tempted to increase the stakes.
But perhaps the most interesting aspect of Obama’s plan is what it augurs for the G.O.P. nomination fight. To be sure, there’s very little chance that any of the Republican candidates will embrace the idea of raising tax levies on the rich. Many of those expected to run have signed Grover Norquist’s pledge never to raise taxes under any circumstances; reneging would plunge them into an unholy war with the right. “Raising taxes on people that are successful is not going to make people that are struggling more successful,” Senator Marco Rubio, who also appeared on “Face the Nation,” said. “The good news about free enterprise is that everyone can succeed without punishing anyone.”
But just because Rubio and his fellow Presidential hopefuls won’t support the first half of Obama’s plan doesn’t mean they can’t embrace the tax-cutting half. To the contrary, it’s easy to imagine middle-class tax cuts emerging as a central issue in the G.O.P. primaries, with the candidates vying to outdo one another. And, unlike Hillary and her economic advisers, the G.O.P. hopefuls are unlikely to be overly concerned with how to pay for the giveaways they propose.
Such unconcern would represent a bit of a change. Ever since the Great Recession sent the budget deficit soaring to ten per cent of G.D.P., Republicans have struggled to reconcile their old Reaganite religion of supply-side economics with their claims that Obama was bankrupting the country. When Mitt Romney, in 2012, said that he would cut everybody’s taxes by twenty per cent without raising the deficit, but didn’t identify spending cuts, his plan was widely ridiculed. Famously, the Tax Policy Center, a recognized non-partisan authority on such matters, described the proposals as “mathematically impossible”—a judgment from which Romney’s campaign struggled to recover.
But the economic environment is changing, which means that the political environment is also shifting—and not in the direction that tends to prompt concern for fiscal responsibility. In fiscal 2014, which ended on October 1st, the deficit was just 2.8 per cent of G.D.P. That means that it is nearly back to its average level over the past forty years. With G.D.P. growth buoyant, the deficit is likely to fall further this year. When deficits are low, they begin to recede from the public consciousness, and charges of fiscal recklessness carry less heft.
Neither party has fully adjusted to this new reality. Obama’s plan is a model of financial rectitude: modest tax cuts and spending programs financed by clearly identified increases in taxes and fees. That’s very laudable. However, recent history suggests that Washington, except in an economic crisis, doesn’t operate in this way. As deficits fall, the temptation to introduce another big tax cut often becomes overwhelming.
The Democrats may try to resist the temptation. Al Gore did so in 2000. But if Hillary, or another Democratic candidate, is serious about introducing tax and spending programs that would make a serious dent in wage stagnation and inequality, she (or he) will be faced with the choice of introducing bigger tax increases on the rich than Obama is proposing, or forgoing tax hikes and making some optimistic projections about the deficit. With the Republicans ever eager to portray the Democrats as inveterate tax-raisers, the choice will be a tricky one.
On the Republican side, there could well be a free-for-all. Jeb Bush has, in the past, positioned himself as a deficit hawk, even suggesting that he would be willing to accept modest tax increases in return for big spending cuts. As the primaries approach, will he stick to that position? Rand Paul and Mike Huckabee have both endorsed a flat tax. Rubio, together with Senator Mike Lee, a Utah Republican, recently proposed a two-tier tax system in which most people would pay a rate of just fifteen per cent. Romney, if he does run, will doubtless have another tax-cutting scheme in his pocket. Even Chris Christie, if he enters the race, will need to find a way to avoid being portrayed as a governor who raised taxes.
We won’t hear anything about all of this on Tuesday night, of course, when President Obama, basking in a recent bounce in his approval ratings, delivers his big speech. But the world is changing, and the State of the Union address will reflect that. On Twitter, Vox’s Ezra Klein pointed out that Obama’s plan is the first big policy proposal of the “post-recession, post deficit panic era.” It won’t be the last.
John Cassidy has been a staff writer at The New Yorker since 1995. He also writes a column about politics, economics, and more, for newyorker.com.