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09.19.11

Obama: Rich Need to Pay Up

In a blunt speech, Obama pushed a $3 trillion deficit-reduction plan that would raise taxes on the rich and spare most entitlements. Zachary Karabell on the political benefits.

UPDATE: At a press briefing at the White House Monday, President Obama formally announced a package revealed over the weekend to trim $3 trillion off the federal deficit over the next several years. Picking up on the theme of his recent jobs speech, Obama demanded that Congress move on the act immediately. “They should pass it right away. I’m ready to sign a bill,” the president said. Obama stressed the necessity of new revenue to solve the budget crisis, and said he would veto any bill that didn't bring in new money. "We can't cut our way out of this hole," he said. The new proposal would establish a minimum tax rate on millionaires to avoid loopholes, and would make cuts to entitlements and Pentagon spending. Obama said the bill would cut $2 in government spending for every $1 in new revenue.

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With the end of summer, the air is again humming with the dulcet tones of Washington partisan warfare. Soon, the “debt panel” will begin its deliberations on reducing the deficit, but President Obama has already fired the first salvo. He is calling for the introduction of a “Buffett Rule,” named in honor of Warren Buffett’s call for higher taxes on the very wealthy.

Under this new rule, individuals with incomes in excess of $1 million would be required to pay a minimum amount of tax no less in percentage terms than the average middle-class taxpayer. Buffett famously complained that the tax code is unfair. With his stratospheric income, he pays less than 20 percent because of various deductions and lower rates applied to certain types of investment income, whereas his secretary earning $60,000 pays 29 percent. Obama’s proposal would establish a minimum rate presumably above 20 percent that would still be less than the 35 percent marginal rate applied to income above $379,000 but would be more than many millionaires currently pay. The total number of filers affected? About 450,000 out of more than 144 million tax returns filed last year, or about 0.3 percent of taxpayers. And even that 450,000 somewhat overstates the number of individuals affected, given that the number includes small businesses as well as wealthy individuals.

But much like the earlier firestorms over the estate tax, the Republicans were quick to denounce the proposal as a naked act of class warfare. Rep. Paul Ryan said on Fox News yesterday that the plan “adds further instability to our system, more uncertainty, and it punishes job creation.” The best line came from the ever-snarky, always-spinning Senate Republican leader Mitch McConnell. “If [Buffett] is feeling guilty about [his tax rate], I think he should send in a check … But we don’t want to stagnate this economy by raising taxes.”

This fight, however modest, is one that Obama stands a good chance of winning.

The Republican counter is that any increase in taxes penalizes the prosperous, impedes growth, and creates incentives to do less work or earn less money. That argument has always had a hollow, bizarre ring. Does anyone really assess their tax burden and decide that they would prefer to earn less in order to avoid paying a higher marginal rate? Yes, in a country of more than 300 million people, the statistical likelihood is that there are a few who would indeed say, “I would rather earn $378,000 a year and stay under the threshold of 35 percent taxes than earn $500,000 and pay a few thousand dollars more in taxes.” But there is also a statistical likelihood that about the same number of people believe that there is a secret NASA base on Mars. We live with outliers; we don’t construct national policy on the foundation of their delusions.

As for the charge of class warfare, clearly the bar has been lowered and the term debased. If championing the relatively modest proposal that those earning more than a million dollars at a minimum are taxed at an average rate is class warfare, what would today’s Republicans do if Obama got up and said the following: “For too many of us the political equality we once had won is meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor—other people's lives. For too many of us life is no longer free; liberty no longer real; men can no longer follow the pursuit of happiness.” Those are fighting words, but they aren’t, of course, Obama’s fighting words. They are Franklin Delano Roosevelt’s, uttered at the Democratic National Convention in 1936 as FDR accepted his party’s nomination for a second term as president.

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It is inconceivable that Obama could be nearly as partisan or nearly as unapologetic in his rhetoric, yet today’s Republicans respond to even lukewarm suggestions that the rich pay a tad more as tantamount to class warfare and socialism. Unacknowledged is that in tandem with the millionaire’s tax, Obama will also propose cuts and reforms to Medicare and Medicaid, a concession to entitlement reform that FDR and subsequent Democratic presidents never made or thought of making.

This fight, however modest, is one that Obama stands a good chance of winning. The audacity of the current incarnation of the Republican Party will be sorely tested by this proposal. When Democrats called for tax increases for those making more than $250,000, Republicans were able to twist that into an attack on entrepreneurs and ambitious small-business owners. It will be much harder to do that with the $1 million hurdle. And while tens of millions who would never be affected adamantly opposed a change to the estate tax, it will be a harder sell to hold the line against a minimum payment for millionaires.

As a result, Obama has at last arrived at something that has political traction and widespread appeal, which in turn puts the Republicans in the problematic position of opposing something that a significant majority support. It is an effective political salvo for a White House that has been increasingly neutered.

Not to spoil that party, however, but the economic benefits are much more limited. The “Buffett Rule” does not materially reduce mounting deficits, though it does enshrine notions of fairness in the tax code. Championing it is politically astute heading into the presidential election, but it is not the act of economic stewardship and innovative policy that the country needs. Combined with a “jobs” bill that consists mostly of extended tax breaks and unemployment insurance, we have an energized president who shows every sign of running an effective re-election campaign and every indication of being unable to respond dynamically to a troubled economy and a confused, angry middle class. The Buffett Rule is fair, politically powerful, and eminently defensible. At best, it will expose the Republicans as tax ideologues with a soft spot for extreme wealth. But it will still leave the millions who are struggling with no light, no tunnel, and no way forward.