Obama Should Not Compromise
For several months, Republicans and Democrats have been debating whether to extend the Bush tax cuts and, more specifically, to what extent. Said cuts expire at the end of this year. Typically, Republicans have wanted to extend them in their entirety, while many Democrats — especially the President himself — have specifically wanted to end them for the upper class. This goal has commonly been distorted into the notion that the cuts will be ended for everybody if the Democrats get their way. That may be contributory to a recent turn of events.
White House Senior Adviser David Axelrod stated this week that President Obama is willing to negotiate on the extension of tax cuts for the upper class. This uncharacteristic change of heart may be attributed to any number of factors, including the aforementioned media coverage, sweeping Democratic losses at the midterm elections, and approval ratings consistently below 50%. If it’s because of struggling approval ratings — which, as usual, can be partially tied to distorted media coverage — liberals and progressivists should take caution. Catering to popular misconceptions and the ideologies that stem from them is a defining characteristic of tea party candidates.
More likely, though, is that this is the result of intimidation. For the past 21 months, Republicans have been largely unwilling to negotiate on legislation proposed by President Obama. To top it off, some have talked about eliminating such bills as Health Care Reform and the Climate Change Bill, while others have taken it so far as to claim their goal is ensuring Obama is a one-term President. Now that they have the majority in the House of Representatives, Obama may feel obligated to cooperate with the obstinance.
Unfortunately, the American economy cannot afford to let all of the tax cuts continue past the end of this year. Because of our increased military presence in Afghanistan, military spending has dropped only slightly. Add to that increased domestic spending, and the deficit is currently on the rise. Granted, many of the domestic spending plans have been outlined with a distinct chance of a return on investment, but if something can be done to manage the damage in the meantime, it should. Considering much of the bitterness toward Ex-President Bush was due to his focusing more on Iraq than on America, cutting domestic investments such as the two aforementioned Obama bills clearly is not the way to go. We would essentially just end up with more of the same.
Our continued military presence in Afghanistan has been deemed necessary by General David Petraeus. Seeing as he has no military experience, he has chosen to trust the advice of an expert. While pulling out of Afghanistan would eliminate a great deal of spending, it would have unignorable international repercussions. Also, doing it safely would take several months, perhaps well over a year.
Until recently, Obama wanted to end the Bush tax cuts for the top 2% of earners. According to this diagram, the top 1% of income earners in America possessed 43% of the financial wealth in 2007, but the bottom 80% only possessed 7%. Therefore, equal tax rate increases on both sectors would draw six times as much tax revenue from the top 1% as from the bottom 80%. Clearly, this is the most effective group to target. Also, losing an additional 2% of one’s income to the IRS is typically far more detrimental to a person making $20,000 a year than to someone making $200,000 a year.
Ending tax cuts for the upper class elite could also help with the unemployment rate, theoretically speaking. Going off the idea of trickle down economics, some believed that corporations would pass on their Bush tax cut savings to their employees in the form of raises, benefits, and staff expansions. Obviously, that did not happen. If corporations are forced to pay higher tax rates, they will need to increase sales, and thus production, to maintain their current bottom line. That means more companies will be hiring to increase productivity.
As unemployment decreases, tax revenue from the middle and lower classes will increase. It will grow even further if increased productivity results in an increase in average wages, as it very well could. Increasing taxes for the bottom 80% could not conceivably have this sort of domino effect. In fact, the resulting diminished spending would resonate through corporate income sheets and into even more layoffs.
So obviously, if tax cuts are going to expire for anybody, ending them only for the top 2% would be the most effective. Ending them for everybody else as well would counteract the snowball effect created by such a strategy. Our other two primary choices for maintaining the deficit are pulling out of Afghanistan and eliminating domestic spending. General Petraeus as deemed the former unadvisable, and as aforementioned, many of the domestic spending plans have a clear potential for return on investment. Besides, getting rid of those would have President Obama looking like George Bush with an Ivy League education.
With Permission from E.A. Setser