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White House’s Fervor for Low Taxes Eliminating Revenue Options for Deficit Reduction

The President made plenty of promises on the campaign trail in 2007-2008. He claims that he keeps a checklist and has made progress on 70% of them. Even if you believe that, 30% of what he said on the trail never came to pass. And people have come to anticipate that politicians won’t follow all of their promises.

But of all the campaign promises, President Obama clearly values one above all the others. And that’s the one to not raise taxes on anyone making under $250,000 a year. He cut the tax cut deal because of an unwillingness to “harm” that subset of Americans (which is far more than a subset; it’s around 98% of them). And now, he’s refusing to move forward with tax reform or the Bowles-Simpson recommendations that raise taxes on them, as well.

Barely a month after Obama’s fiscal commission laid out a road map for reining in the soaring national debt, the president’s resistance to tax increases for families making less than $250,000 a year has ruled out a key prescription: a plan to reduce cherished but expensive tax breaks for individuals.

Obama is planning to propose deeper cuts in agency spending in the budget request he will submit to Congress next month, including a sharp reduction at the Pentagon. But the president is unlikely to trim nearly as much from future spending as the commission has proposed and nowhere near as much as House Republicans are demanding, the sources said.

Without deeper cuts or fresh revenue, White House budget officials will have a tough time meeting the president’s own targets for short-term deficit reduction, including a promise to narrow the budget gap from nearly 9 percent of the gross domestic product last year to 3 percent of GDP by 2015.

One of the few decent starting points in the cat food commission recommendations was their prescription for tax reform. It raised $1 trillion above current law, and while I didn’t think that tax rates had to be flattened as much as they did in the process, Bowles and Simpson did boldly eliminate most tax expenditures, which invariably go to people with higher incomes. But clearly, the President has accepted the logic that removing a tax expenditure equals a tax increase. And he won’t do that for people making under $250,000, or anyone, it seems.

This may be good politics. It’s not necessarily good budgeting. And the alternative, raising taxes on those over $250,000, always seems to get tossed out in the process. So we end up with this artificially low tax base, far lower than other industrialized nations and the lowest in America in at least 50 years. However, in the short term, it does keep the fiscal scold dogs at bay. Most of the figures seen as “disappointed” in this move would rather cause pain and suffering for the poor at the expense of the rich. The President wants to exempt 98% of the country from pain, and if the 2% get off in the process, so be it. That would be number 2 on the list of bad things, not number 1.

However, I do think this is an ominous sign for Social Security. You can envision some kind of “grand bargain” where fixing Social Security is offered as evidence of the Administration wanting to embrace “hard truths.” And you have to think that the vow not to impose a higher tax burden on those under $250,000 will apply to that as well. That means he won’t move to directly increase the payroll tax cap, now set at around $108,000. During the campaign, his plan would have created a “doughnut hole” and only lifted the cap above $250,000. I’d like to see him return to that but I don’t see it. And all that’s left, in that case, is tweaking benefits and raising the retirement age.

Obama ran against these solutions during the campaign as well, but remember, no campaign promise matters as much as that promise on taxes. So when two promises come into conflict, taxes will win every time.

It’s possible that the Administration will look elsewhere to prove their fealty to the cat food commission. Overhauling the corporate tax structure (closing loopholes, lowering the tax rate) might be the stand-in to prove to “the markets” that the country can meet fiscal challenges. But they want to keep that revenue neutral, making it impossible to help with the deficit. So I think liberal groups are right to worry about the future of Social Security. After all, it’s not a bedrock promise for this President like low taxes.

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David Dayen

David Dayen

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