We call this grossly inadequate because — as we’ve been saying since Mr. Obama irresponsibly promised during his first campaign that he would never raise taxes on the middle class — it’s impossible to tackle the federal debt by taxing only the wealthy. As the cost of retirement and health care for an aging population rises, the middle class is going to have to pay more, and federal benefits are going to have to be adjusted.
But Republicans want to extend all the rate reductions, regardless of the deficit, and some of the president’s fellow Democrats, spooked by GOP anti-tax rhetoric or persuaded by their wealthier donors, are equivocating. Some, including House Minority Leader Nancy Pelosi, have suggested redefining “well-off” to include every family earning less than $1 million per year, and extending the rate reduction for everyone below that level. This is a recipe for fiscal disaster — a disaster that will hurt society’s most vulnerable, because programs they depend on will be the first ones cut as federal borrowing costs rise.
The Dec. 31 deadline is setting up a tiresomely familiar game of political chicken. Everyone, including Federal Reserve Chairman Ben S. Bernanke, agrees that letting all the tax cuts expire at once would land a powerful punch on a weak economy, especially since a package of spending cuts worth $1.2 trillion over the next 10 years would take effect at the same time. But Democrats, led by Sen. Patty Murray (D-Wash.), are vowing to let all the rate reductions expire rather than extend them for upper-income brackets. Republicans are insisting they won’t compromise. No one even pretends compromise is possible before the election.
The intelligent response would be to agree on long-term revenue increases and spending cuts while softening the short-term blow. It would be dangerous to national security, as Defense Secretary Leon Panetta has argued (unsupported, thus far, by his commander in chief), to impose across-the-board budget reductions on the Pentagon.
Allowing those and all the other scheduled spending cuts and tax hikes could shrink the economy by about 3 per cent in the first half of 2013, at the cost of 1 million to 2 million jobs, the Congressional Budget Office estimated months ago. Given the deterioration in the economy since, that estimate might be optimistic.
But it would be even less responsible to extend all tax cuts indefinitely and revoke all spending reductions without any progress on long-term deficit reduction. It would cripple long-term economic growth, as the government’s financing needs drained capital from the private sector.
If the only way to achieve tax reform with a reasonable increase in revenue is to reset everyone’s rates at Clinton-era levels and then argue about which to reduce, that would be preferable to continuing on the road to catastrophe.