I’m in the camp that believes Republicans have no choice but to agree to raise taxes on the top 2 percent of earners. The party has been successfully caricatured as the servant of the rich. This is unjust, yes, but justice is imperfect in this life. It’s political suicide for Republicans to stand fast on maintaining current rates for high earners even at the cost of raising taxes for everyone else. Imagine if we went over the fiscal cliff. In January, Obama would call upon Congress to pass a law restoring the tax rates for 98 percent of filers. What could Republicans do then, refuse?
There is a time for strategic retreat. Republicans are not without tactical opportunities though. They can reply, as my friend Michael Medved has suggested, that if the Clinton tax rates are desirable, so are the Clinton spending rates. They could resurrect a budget from 1998 and pass it. Democrats would protest that 1998 spending rates are not remotely commensurate with our needs. But wait, don’t they argue that the Clinton years were economic utopia? Were people living in cardboard boxes on the streets in the 1990s? While they’re at it, they could propose Clinton levels of regulation, too.
Alternatively, they could pass the Simpson/Bowles proposal, reminding voters that the president ignored his own debt commission. Simpson/Bowles has many flaws (including too few spending reductions), but it does at least make big strides toward taming the debt. Endorsing it would show that Republicans are prepared for painful compromise in the name of getting our house in order. The president talks of a “balanced approach” to deficit reduction — by which he seems to mean more taxes and more spending. His former chairman of the Joint Chiefs of Staff has fingered national debt as the “greatest national security threat” we face. Yet the president has yet to make a genuine proposal to cut spending.
Republicans must bow to political reality about tax rates, but it’s worth a backward glance to consider just how great a victory this is for demagoguery.
Consider that the Democratic party is now committed, body and soul, to defending “the middle-class tax cuts.” They are the party of the middle class, they trill. Yet when these tax rates were enacted, every living Democrat denounced them as “tax cuts for the rich.” Every Democratic tongue swore that Bush had passed “tax cuts for the rich.” The Republicans piped in response: “No, they were tax cuts for everyone.” But they were drowned out. The libel stuck, and it persists even now as Democrats go to the mat for those Bush middle-class tax rates.
Also, the Bush tax cuts made the tax code more, not less, progressive. More than 8 million taxpayers were relieved of paying taxes altogether because the Bush reforms doubled the child tax credit and expanded the Earned Income Tax Credit. That may have been a political miscalculation as it insulated more Americans from the cost of government. But it’s certainly at odds with the conventional wisdom that Republicans didn’t consider the needs of working Americans when they were in power.
As for the rich, yes, the rates went down. But the percent of the total tax burden shouldered by the top 1 percent of earners increased from 37 percent in 2000 to 40 percent in 2007. The bottom 50 percent of taxpayers paid 16 percent less in 2007 than they had in 2000. Their share of the total burden fell from 3.9 percent to 2.9 percent.
Mr. Obama has successfully deluded people into believing that the rich pay less in taxes than their secretaries. In fact, as Steve Moore has shown, the top 5 percent of taxpayers earn 37 percent of national income but pay 61 percent of income taxes.
Democrats, especially this president, have scorned the Bush years for their accumulated debt and for raging inequality. Yet, as Professor Emmanuel Saez of Berkeley (yes, Berkeley) has shown, the income gap during Obama’s first term has been far more pronounced than it was during the Bush years. As Alexander Eichler of the Huffington Post put it, “The rising tide has lifted fewer boats during the Obama years — and the ones it’s lifted have been mostly yachts.”
The demonization of the rich paid electoral dividends: Obama will get his way on tax rates. But the problem he conjured — the rich getting richer at the expense of everyone else — was a crude fiction. It’s the kind of class warfare appeal that has worked all over the globe. We used to be an exception. No more.