“Taxmageddon”? No, just a reprise of giving in to hostage-takers

Apr. 18, 2012 — In terms of a climactic moment on taxation, screamed the front page of the latest Sunday Review in The New York Times, “The end of 2012 will be unlike any other time in memory for the government.” According to David Leonhardt’s “Coming: ‘Taxmageddon,’“ taxes on the average middle class family could go up by “about $1,750.” Taxes on poor families would “rise somewhat, too.” Oh, and total federal taxes on “top-earning families” would rise by “tens or even hundreds of thousands of dollars a year.”

Hold the scary music for a moment, and hold the framing, too.  Despite a lede that features the potential impact on the middle class — look, we’re all in this together — it is entirely clear that no one is looking to raise taxes on the middle class. What is at issue, just as it was in 2010, is whether the era of enormous tax cuts for the wealthy — initiated by President Bush and extended by President Obama contrary to his campaign pledges — will continue.

You can refer to the prospect of the wealthiest families having to pay tens or even hundreds of thousands of dollars more per year as a crisis of biblical proportions — and, indeed, many of those high-wealth households and their supporters will fight change as though it were the battle of the end times — or you can reflect on what a what a windfall each such household has reaped for more than 10 years at everyone else’s expense.

In any event, the story is not new, and, sadly, is unlikely to have a different ending than it did in 2010. Then, the Bush tax cuts on the wealthy would have expired without any action by Congress — no filibuster needed to be overcome. But Republicans said they would refuse to agree to an extension of unemployment benefits and would likewise not agree to a reduction in the payroll unless the Bush tax cuts on the wealthy were kept in place.

The result of that hostage taking? President Obama gave in, and thus became the co-author of the tax cuts for the wealthy that have continued. “Taxmaggedon” cites the President and his advisors as saying that, this time, the President will “not extend all the Bush tax cuts.” I’m not reassured.

“Taxmaggedon,” a very helpful guide to Beltway conventional wisdom, tells us it is not the GOP who will have to decide whether preserving huge tax breaks for the wealthy is worth having everyone else’s taxes go up. That’s taken as an unremarkable and unbendable principle of the physical universe. It is, Leonhardt advises, “Mr. Obama [who] will have to choose between standing down (once again) and allowing taxes to rise on every household when the economy is still likely to be weakened.”

Reporters, of course, did not come up with that asymmetrical way of viewing the politics of the situation entirely on their own. The President’s predicament of being widely seen as the one with a choice to make stems in part from the fact that, in truth, the President is always a hairsbreadth away from giving in. And the GOP has good reason to believe that the President’s heart is still not truly in a fight to raise tax rates on the wealthy from their current historic lows.

There is a very loud chorus that wants not only to accept low marginal rates on the income of the wealthiest Americans, but lower those rates still further. The characteristic rhetoric, which almost always pairs calls for deficit reduction with plans for extensive tax “reform,” is rendered pitch-perfect by Leonhardt. 

The “kind of deficit solution that many experts prefer,” Leonhardt writes, “involves sweeping tax reform that would close loopholes, reduce marginal rates, simplify the tax code and perhaps even lift long-term economic growth.”  On the deficit side, they sell the idea that it is essential that we scale back Social Security and Medicare from their current, purportedly “unrealistically” generous, levels; on the tax side, their Holy Grail is the principle of “reduce the rates and broaden the base.”

It turns out that, even though he has promoted the so-called Buffett Plan to require the wealthiest Americans to pay an effective tax rate of at least 30 percent (a plan the Senate GOP defeated yesterday on a procedural maneuver to prevent debate), the President is firmly in the camp of the reduce the rates crowd. A report supporting the Buffett Rule that the White House released last week, in fact, reaffirmed the President’s State of the Union call for “comprehensive tax reform that cuts rates, cuts inefficient tax loopholes, cuts the deficit, [and] increases job creation and growth” (emphasis added).

Leaving aside the fact that every proposal that would reduce tax rates on the wealthy comes with the promise that doing so will yield economic growth, we’ve already reported on the fiscal imprudence of lower-the-rates-and-broaden-the-base in the corporate context. The premise is equally flawed on the personal income tax side. If there is an unfair feature of the rate system — in this case, remarkably low rates on the wealthy — fix it. The fact that the wealthy are currently able to game the system through tax breaks that give them a lower effective rate is not a reason to endorse that legalized cheating, it is a reason to restrict deductions and exclusions at the same time that rates are being raised.

The fact that a solution to the under-taxation of the wealthy does not solve all problems of the tax system is neither a reason to shy away from solving the under-taxation problem, nor an excuse to treat all tax advantages as being equivalently lacking in social utility (Leonhardt leaves such an impression when, without discussing the social and fiscal costs of an alternative, he points out that popular tax breaks like the cost of health insurance provided by employers are extremely costly to the government).

Allowing marginal tax rates on the wealthy to return to their Clinton-era levels requires no Congressional action. What it does require is for President Obama and Senate Democrats to articulate and stick to a very different vision for the country than that being peddled by the GOP. Such a fight would not be an Armageddon to be feared; it would represent precisely the expression of clashing values between which voters should have the opportunity to choose in November.