President Obama’s Slippery Slope on Taxes

Supporters of President Barack Obama often depict him as playing chess while his Republican opponents are playing checkers. Much the same is being said of Obama and the Democrats on the deficit-reduction supercommittee for allowing the supercommittee to fail in its mission. The argument is that the Republicans are now in a bind because they will need to try to pass a separate bill in order to permanently extend the Bush tax cuts. But it would seem that President Obama is in substantially the same position as he was in December 2010 when he agreed to extend all the Bush tax cuts for two years.

In December 2010, Obama wanted to extend unemployment benefits and cut the FICA tax by two percent for employees for one year. He now wants to extend unemployment benefits, cut the FICA tax by 3.1 percent for both employees and employers, and maybe get the parts of the jobs bill enacted that have failed before.

After Obama agreed to extending the Bush tax cuts, he vowed that he would fight against renewing them once again for the wealthy. His present position is that he wants the cuts preserved only for individuals earning less than $200,000 annually and households earning less than $250,000 annually; however, it is very unlikely that Republican lawmakers will agree to extending only part of the Bush tax cuts.

President Obama’s position is complicated by his present argument that in not agreeing to lower the FICA tax rate, opponents of the reduction are actually increasing taxes for those subject to the FICA tax. If Obama can’t get the partial extension of the Bush tax cuts, he may again be forced to agree to extension of all of them so as not to raise them on lower- and moderate-income taxpayers.

 

Today I read an interesting analysis of the Obama performance on taxes, done by economists at the American Center for Progress. The Center’s economists calculated that under Obama, taxes have been cut by $850 billion, or 1.5 percent of gross domestic product. If Congress passes the next set of Obama’s proposed tax cuts, the total will be $1.1 trillion, or nearly two percent of gross domestic product — close to double the size of the Bush tax cuts in his first term.

In his 12-year plan, Obama proposed total tax increases of $1 trillion, meaning that he has already cut or proposed to cut more in taxes than he is proposing to raise over the next 12 years. His proposed future spending cuts would thus not be accompanied by any increase in taxation revenue.

The economists of the Center for American Progress also charted the relationship of the top marginal tax rate to real annual growth from 1950 through 2010. They found that in the 1950s, with a top marginal tax rate of over 90 percent, real annual growth averaged four percent; however, when the top rate was 35 percent, real annual growth was under two percent. The highest annual growth occurred when the top rate was from 70 to 85 percent and the second highest rate was when the top rate was 90 percent plus. The lowest growth was when the top rate was 35 percent.

 

 

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