Economics, Taxes and Spending

Why Obama might raise taxes on the middle class if he’s reelected

All the 2001 and 2003 Bush tax cuts.

Gone.

It would have been the Mother of All Tax Hikes, a $3 trillion tax increase during shaky economic times. It would have broken a campaign promise not to raise taxes on middle-income Americans.

President Obama was shockingly close to embracing such a plan back in 2009. And if he’s reelected in 2012, Obama may well reconsider the idea and let all the Bush tax cuts expire as they are scheduled to do in 2013.

At least, that’s the story—and prediction—told by journalist Noam Scheiber in his new book, The Escape Artists: How Obama’s Team Fumbled the Recovery.

Short version: In the fall of 2009, Obama’s chief congressional lobbyist Phil Schiliro cooked up a plan to extend the middle-class Bush tax cuts for two years while letting the upper-income tax cuts expire on schedule. If Congress couldn’t devise a way to pay for the $2.3 trillion extension of the middle-class cuts, they would expire in 2015. Schiliro easily sold White House budget director Peter Orszag on the idea. “[Orszag] believed the only practical way to balance the budget was to repeal all the Bush tax cuts, not just the upper-income variety.”

Orszag then presented the plan to Obama:

… the administration’s chief wonk—Barack Obama—was intrigued. He asked a series of encouraging questions about how the proposal would work. According to two sources in the room, he was taken with both the political merits—that is, putting Republicans on the defensive—and the policy rationale of lopping trillions off the deficit. He gave no indication that he was troubled by the plan’s most explosive feature: that it would likely break a central campaign promise—not raising taxes on the middle class—one Republicans would surely wrap around his neck with populist glee.

The White House political team and Vice President Joe Biden eventually helped kill the idea. Intriguingly, however, Scheiber thinks that if Obama is reelected, letting all the Bush tax cuts expire—which will happen automatically if Congress does nothing—”may simply be too tempting to pass up.”

As Scheiber explains:

What is clear is that, having been tempted to end all of the Bush tax cuts in 2009, the president would only find the idea more attractive were he to win a second term. At that point, he will never again stand before the voters, at least not as a presidential candidate. There would be nothing to stop him from flouting a campaign promise, even one as sensitive as his tax pledge.

Perhaps most important of all, killing the entire zombie army of Bush tax breaks would be far, far easier than only slaying the upper-income portions. To pull off the former, Obama literally has to do nothing—the tax breaks are slated to expire on their own. To do the latter, he would have to pass legislation extending the middle-class elements. As a practical matter, that means rounding up majorities in the House and Senate, which seems unimaginable given the likely balance of power on Capitol Hill after the election. (There is a third option, which entails striking a deal with Republicans to junk the entire tax code and rebuild it from scratch, but it’s hard to envision this happening between Election Day and December 31.)

My take: Now we have even more evidence as to why Obama created a debt commission—and then rejected its recommendations. It didn’t tax or spend enough.

See, the Bowles-Simpson commission recommended a) cutting individual tax rates to as low as 23 percent, b) eliminating many if not all tax breaks, and c) capping federal spending and revenue at 21 percent of GDP. At that level, taxes as a share of the economy would be about 3 percentage points above the historical average, a massive tax hike.

But even that would not be enough taxpayer dough for many liberal economists, such as those that work in the Obama White House. They believe federal spending will need to be much, much higher in the future due to a combination of factors: an aging population, rising healthcare costs, the need for more public “investment,” and greater debt service costs when interest rates eventually rise. (Indeed, three liberal think tanks recently constructed long-term budget plans, and their average projection for federal spending by 2035 was 25 percent of GDP—with a bullet.)

Generating the tax revenue that Obama would need to finance all his spending would require sharply higher taxes on the wealthy—and everybody else. And according to Scheiber, Obama might well like to start the taxathon with a $3 trillion tax hike on all Americans. Of course, that still wouldn’t be enough, which is why the next step might be a value-added tax.

Obama has been boasting that he has “five more years” in office. To do what, exactly? Now we know.

12 thoughts on “Why Obama might raise taxes on the middle class if he’s reelected

  1. Or maybe theres a one point three trillion dollar deficit and there isn’t one point three trillion dollars worth of politically palatable cuts to be made. But go ahead believing that you can have everything for nothing. Pay your bills or list what you’re willing to give up.

  2. I was kind of surprised when he didn’t propose this in his first SoU. But, his first budget, projected $600 B in revenue from the Cap and Trade plan. When that died, and when the mere existence of the Porkulous didn’t turn the economy around, they scrambled for Plan B.

  3. O’s presidency increasingly takes on a madcap, dynamite-vest flavor. Not sure why the Reps act as if he wouldn’t take down the ship with him.

  4. Prediction:

    Of Obama win re-election is it likely that both House of Congress will be DEM also (there will be zero ticket splitting in 2012). The result I think will be a huge tax increase offset by another Trillion Dollar Stimulus program to mitigate any negative economic consequences of the tax increase.

  5. We’re accumulating approx $100B in new debt each month. Annually, the USA collects $2.2T in tax revenue and spends $3.4T. Our current interest expense on the federal debt ($15.3T) is around $450B annually. Essentially, the excess spending can not go on forever. Late 2015, the interest expense at the current interest rates will approach $1T. The revenue anticipated from Obamas proposed tax increases will face the headwinds of increased interest rates which will exacerbate the deficit problem because the interst expense will skyrocket. It’s impossible to raise tax revenue quickly without destroying the empire. If tax increases dwarf spending cuts, the USA will then get a taste of biting the dust that will make Greece look like a picnic. If Obama truly believes in a socialist agenda, then his identity will truly manifest itself rather quickly. Something needs to happen by the end of the 1st quarter of 2013 or it’s game over.

  6. There may not be enough income to tax but there sure is enough wealth to tax . That is the 401k ‘s and the IRA’s , plenty of money there . And who has that wealth ? Not a lot of Obama ‘s gang , just thrifty middle and upper middle class folks, red state types . And very easy to get at , all those tax payer ID numbers on all those brokerege a/c’s . How much more fair would there be than a 5-7% annual levy in all that illgotten loot . As a Great Man once said ” From each according to his ability (to pay ) to each according to his need ” What could be more fair than that ? Or as a Great American said ” That’s where the money is “

  7. Obama will sign off on another deal with Republicans while he screams about how he’s being held hostage and all the Republican’s care about are tax cuts for the rich. This is great political theatre. Plus Obama is the first populist President in my lifetime and he isn’t about to change that. The tax cuts are a given…

    Personally I would like to see the tax cuts ended for everyone. We are borrowing way too much and by ending the tax cuts we would move over 10% of american’s back into the “I pay income taxes” category. Plus by allowing the tax cuts to expire the democrats could no longer lie about how the tax cuts only helped the rich (only 20% went to the rich…the other 80% went to the poor/middle class).

  8. A while back the WSJ had a calculation that income taxes haf to be 50% of any family income over $80K in order to pay for the current spending. The reality is that the income threshold would probably be lower ($60K?) because the WSJ analysis was based on static assumptions (i.e. no one changes their behaviour when taxes increase and disposible income declines). All of this is simply based on what we’re spending now (i.e. no new programs, no paying for Medicare deficits etc.). While these rates may be revolutionary from an American perspective the average European would just yawn. Socialism costs money and there aren’t enough rich people to pay for it.

  9. Comrade Hoenemeyer, are you predicting or suggesting that 401K’s & IRA’s be taxed or confiscated? How about 100% of wage earners pay income taxes and stop giving 49% of Americans a “free ride?”

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