Real tax hikes, phony spending cuts

President Barack Obama made his pitch yesterday to jack up tax rates on high-income earners and bring a host of new fees that will reach across income groups — offering $3 in tax hikes for every $1 in spending cuts:

Drawing clear battle lines for next year’s elections, a combative President Barack Obama on Monday demanded that the richest Americans pay higher taxes to help cut soaring U.S. deficits by more than $3 trillion. He promised to veto any effort by congressional Republicans to cut Medicare benefits for the elderly without raising taxes as well.

“This is not class warfare. It’s math,” Obama declared, anticipating Republican criticism, which was quick in coming.
The president’s proposal, which he challenged Congress to approve, would predominantly hit upper-income taxpayers and would also target tax loopholes and subsidies used by many larger corporations. It would spare retirees from any changes in Social Security, and it would direct most of the cuts in Medicare spending to health care providers, not beneficiaries.

Benefit programs wouldn’t be unscathed. Obama’s plan would reduce spending for those, including Medicare and Medicaid, by $580 billion. But with Republicans calling for massive cuts in entitlement programs, Obama said he would veto any legislation that cut Medicare benefits without raising new revenue.

His plan also would count savings of $1 trillion over 10 years from the withdrawal of U.S. troops from Iraq and Afghanistan.

The deficit-reduction plan represents Obama’s longer-term follow-up to the $447 billion in tax cuts and new public works spending that he has proposed as a short-term measure to stimulate the economy. The new proposal also inserts the president’s voice into the legislative discussions of a joint congressional “supercommittee” charged with recommending deficit reductions of up to $1.5 trillion.


While Obama and Democrats are talking about how this is a “balanced approach,” The tax hikes are very real, but the spending cuts are phony since many of them were already baked in the cake, as Doug Mataconis notes:

[W]hat we’ve got here is:

  • $1.2 trillion in cuts that were already included the legislation passed  in August;
  • $1.1 trillion in expected savings from ending the wars in Afghanistan and Iraq, which was also accounted for in the legislation passed in August;
  • $1.5 trillion in tax increases, assuming that the revenue projections the Administration provides turn out to be accurate; and,
  • $580 billion in spending cuts spread out over Medicare, Medicaid, and other spending programs

So it seems to me that what we’ve really got here is $1.5 trillion in tax increases and $580 billion in actual new spending cuts. This is what the President calls “fair”?

Whether or not it’s “fair” doesn’t bother Obama, he knows this isn’t going to pass. What he is concerned about right now is laying the groundwork for 2012. And if this proposal is any indication, we can expect Obama’s campaign to play up on the populism that took him to the White House in 2008. However, Mark Penn, who served as an adviser to Hillary Clinton, believes that this class warfare approach is a losing strategy:

Barack Obama is careening down the wrong path towards re-election.

He should be working as a president, not a candidate.

He should be claiming the vital center, not abandoning it.

He should be holding down taxes rather than raising them.

He should be mastering the global economy, not running away from it.

And most of all, he should be bringing the country together rather than dividing it through class warfare.
[W]hen Bill Clinton was facing the fight of his political life in his 1996 re-election, he got rid of all the class warfare language used by traditional Democrats, got behind welfare reform and the balanced budget, and supported a strong, activist government that spent and taxed less rather than more. As a result, Clinton trounced the Republican nominee and was the first Democrat to serve a full eight years since Roosevelt. And the country got behind the president.

Obama’s team actually believes that in the last six months they have courted independent voters and that didn’t work, so now they are turning to activating the base with higher taxes on the wealthy. However, he never made any meaningful appeal to those voters in terms they would understand. He supported extending the Bush tax cuts, temporarily zoomed up in the polls, and then promptly repudiated what he had done, only to then fall back down.

The 2010 mid-term elections were fought over Obama’s healthcare plan and on his plan to raise taxes on the wealthy by ending the Bush tax cuts. The results were, in his own words, a “shellacking.” After his most recent speech to Congress, voters in New York City’s Ninth Congressional District just elected a Republican for the first time since 1920.

And now, Obama is pressing the case for higher taxes, following in the footsteps of Walter Mondale. Higher taxes always seem to poll well, but in reality the country sees that as a last resort.

In Obama’s case, it is particularly damaging to his chances for re-election because of the unique coalition he put together in 2008 to win. The President won the lion’s share of everyone making under $35,000. He then did very poorly with middle class voters, but he got a remarkable half of the 26% of the voters whose households make over $100,000. Never before have so many voters fallen into that category and never before had so many of them voted Democratic. Even the so-called top 1% making over $200,000 is actually according to the exit polls 6%, and they mostly (52%) voted for Obama. Without similar support from those upper-income voters, Obama has no way to recreate the numbers that sailed him to victory. And while these voters have become far more socially tolerant, they have also become far more impatient when it comes to economic issues.

The rhetoric from Obama rings hollow. The United States already has the most progressive income tax system in the world, with the top 10% of income earners paying almost 70% of all income taxes despite earning just under 46% of all income.

But Obama’s proposed millionaires tax hike, as James Pethokoukis notes, will not likely lead to the revenues that Obama expects:

Higher taxes on small business and entrepreneurs would slow growth and reduce tax revenue. It would also encourage greater efforts at tax avoidance. The 1993 Clinton tax hikes, for instance, only generated a third of the revenue that CBO forecasted. And those increases were instituted when the economy was growing at a steady 3% clip, not stuck in slow-growth mode like the U.S. economy currently is. From Obama’s speech, the it seems to me that the Buffett Rule is probably a special capital gains tax rate of 28 percent for people making $1 million a year.

These tax hikes may rally his base, but it will have real consequences. But it’s not good policy to raise taxes during tough economic times — especially as we teter on a double-dip recession. Do believe me? Just listen to Obama from two years ago:

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