President Obama proposes to preserve the Bush tax cuts for everyone earning less than $250,000 a year, but letting them expire for everyone above that arbitrary line. The Republicans say that's class warfare and it would hurt the economy by penalizing job creators. In fact, the president's plan is a sensible middle ground, albeit a nakedly political one.
The United States currently is borrowing about 40 cents of every dollar it spends. That rapid increase in debt is unsustainable over the long term, because it would not only severely weaken the federal government's finances but suck the life out of the economy as a whole, not to mention risking a national credit crisis.
Paradoxically, however, a sudden increase in taxes and cuts in spending, which together would reduce the deficit, would plunge the economy back into recession, at least for the short term.
The Congressional Budget Office estimates that if all of the Bush and Obama tax cuts were allowed to expire at year's end, and if scheduled spending cuts also were put in place under current law, the federal budget deficit would be cut by a whopping 5.1 percent of Gross Domestic Product between 2012 and 2013. But at the same time, the economy would contract by 1.3 percent (a recession) in the first six months of the year and grow by an annual rate of 2.3 percent in the second half of the year.
Rather than risk a return to recession, it would make more sense to pursue a more moderate policy: Raise some taxes, cut some spending, but don't let all the tax cuts expire at once.
Which brings us to President Obama's plan. He would let the Bush tax cuts expire for those making $250,000 or more a year, but leave them in place for all those making less. There are countless other variations that could be adopted, of course, but at least the president's plan takes a middle ground. Granted, his position is political populism, because it appeals to the vast majority of Americans. It's politically much easier to espouse raising taxes on the wealthiest Americans and sparing everyone else.
Why? Because people with moderate-to-low incomes will spend their tax cuts, stimulating the economy. Unlike the rich, they won't simply hoard their windfall.
Obama's tax plan would reduce the deficit by an estimated $850 billion over 10 years, making a start toward fiscal discipline. The Republican insistence on extending all the Bush tax cuts would stimulate the economy more in the short term, but exacerbate the deficit. How's that for irony?