December 12, 2010

Obama's Long-View on Taxes a Huge Mistake?

"I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub." - Grover Norquist, President of Americans for Tax Reform

Obama talks a good line about taking the long-view in defending the ransom he's willing to pay to Republican hostage takers on tax legislation.

Unfortunately, Obama's long-view is probably a huge mistake. Many of us have that gut feeling. James Kwak (real name), blogging on Simon Johnson's baseline Scenario site, explains. First, he argues that the tax cuts for the wealthy are likely to become permanent:

If you think the tax cuts were bad policy, your chances of fixing that bad policy are much worse in two years than they are now. The administration’s best card would have been a threat to veto any bill that contained an extension of the tax cuts for the rich. The House is going to pass an across-the-board permanent extension in 2012. Are the Democrats going to block it in the Senate in an election year? Is Obama going to veto it in 2012? (And even if he leaves it for a lame-duck session, he’s going to have to make a commitment during the campaign.)

He then reminds us that this permanent tax policy is a permanent redistribution of wealth upwards:

This was the best chance to kill the tax cuts once and for all. Yes, it would have been worse in the short run for the economy. But this is a huge price to pay for a modest stimulus made up entirely out of tax cuts (largely tax cuts for the rich). Instead, we are stuck with a huge reduction in the tax burden of the rich and a small reduction in the tax burden of the middle class–which, on balance, helps the rich and hurts the middle class–forever.

Then he reminds us of the Republican long-view, toward which they've been marching for decades, and are nearing the final plunge of their stake, thanks in part to this tax deal from Obama:

... the old Republican “starve the beast” strategy: cut government revenues to the point where it is unable to do anything. ... Republicans have cut revenues and continued to spend on whatever they felt like spending on. But the core of the strategy is that if you cut taxes at every possible opportunity, eventually you will force the government into a crisis where something has to give (and probably it will be a Democratic administration that takes the political hit for cleaning up the mess). And unless American public opinion does an about-face, the thing that will give will be entitlements.

In other words, don't be fooled by excessive Republican government spending, thinking that it is a contradiction to their "less government" philosophy. Rather, they want to spend our government into hoc so that it has no alternative but to cut social programs. Kwak looks into the crystal ball at how this will likely play out:

So perhaps with the best intentions, the Obama administration, by making it more likely that the Bush tax cuts will become permanent... is probably hastening the day when push will come to shove and Medicare will be gutted. The bigger the projected national debt, the more seemingly reasonable people in the middle of the ideological spectrum shake their heads sadly and say something has to be done about Medicare, as if it’s a fact of nature and not a fact of politics.

Obama's unwillingness to at least try to draw the line now makes one wonder whether he is blind to this scenario or whether he also believes in a version of the "starve the beast" strategy.

Baseline Scenario Blog, "More on the Tax Deal," by James Kwak, December 8, 2010.


1 comment:

Citizen Shelly said...

I share the long-term fears of these tax cuts. This is a mistake by Obama, and a lasting one, and even though I understand his reasoning, it's bad reasoning. He's naive if he thinks there is any chance these will be overturned at any point in the future. These wealthy tax cuts will become permanent now because they have the full support of Democrats as well as Repubs. No one will campaign on raising taxes, in 2012, either.

This lack of revenue will further weaken our economy. They will never cut defense spending adequately so what will go will be social programs and then people will really be dying in massive numbers. Then finally the revolt will happen, but it will be too late.

Obama does not try to draw the line because he's not a natural leader. Leading comes hard to him, making decisions is hard for him too. In that respect he's the opposite of Bush, but that's not necessarily a good thing in this instance, or all the others where he has caved. He's actually a natural diplomat. That's what he should be, not a President, but a diplomat to some friendly country. He should be negotiating with countries on one or two subjects. He is clearly overwhelmed by the job of POTUS. I'm now of the opinion he has no spine at all. Did he lose his veto pen? Did he lose his backbone? Has he lost his mind?

Messing with Social Security funding isn't a slippery slope, it's a huge, unprecedented and naive mistake.