Soak the Middle Class! In Praise of Higher Taxes on Everybody

There’s a great fiscal debate in Washington, and George W. Bush is winning it. In 2008, Barack Obama campaigned on a pledge not to reverse Bush’s tax cuts for the bottom 98 percent of taxpayers, a promise he has worked hard to honor. That locked in 80 percent of the Bush-era revenue losses. During the current negotiations, Obama’s initial offer includes $1.6 billion in new revenue over 10 years, which would leave intact about 60 percent of Bush’s tax cuts. Simply put, this is not enough: President Obama has conceded far too much to the policy framework of his immediate predecessor.

I’m an unrepentant Clintonian, and our current fiscal situation is one big reason why. Republicans unanimously rejected Clinton’s 1993 budget, and Democrats didn’t much like it either. But it was the right thing to do back then, and it remains relevant today. By the late 1990s, the Clinton tax code was yielding a bit more than 20 percent of GDP, roughly what we’ll need to run the government and stabilize the debt during the next decade—unless the American people are prepared to accept Paul Ryan’s budget cuts, which they aren’t. Bowing to that reality, John Boehner didn’t bother to put the Ryan budget on the table as his opening bid in the fiscal cliff talks.

I note for the record that during Clinton’s two terms, federal spending declined from 22 percent of GDP to 18 percent—the lowest since the late 1960s. So much for the Republican talking point that it’s pointless to raise revenues because Democrats will spend them—and more. A combination of tax increases and spending restraints worked well—macroeconomically as well as fiscally—in the 1990s, and with the necessary adjustments, it could do so again.

I think I understand why Obama took the position he did in 2008, and why he has held to it so tenaciously. Democrats have been on the defensive over taxes since the 1970s, and the middle class, whose incomes were stagnating even before the 2008 collapse, were in no position to absorb tax increases. But we can’t put off the day of reckoning forever. At some point, the American people will have to accept the need to pay for the government they say they want. And that can’t happen unless the middle class participates, one way or another. As Democrats like to say, it’s arithmetic.

Of course no one likes to pay taxes. Still, democracy stands or falls on the proposition that the people are capable of governing themselves, which can’t happen unless they can accept the truth. But how can they accept the truth if they don’t hear it? There’s no alternative: democratic leaders must bet on the maturity and common-sense of the people—not everyone all the time—but the majority in the long run. Surely they can understand that solvency means paying for what we want, the vernacular version of Justice Holmes’s dictum that taxes are the price we pay for civilization.

There is, of course, a reasonable debate to be had about how best to time fiscal changes. No one wants to risk strangling a still-fragile recovery. But there should be no doubt about the outlook in the long-run. Given inexorable demographics and immovable politics, we cannot hope to run the federal government on the average level of revenues—18 percent of GDP—that prevailed over the past fifty years. Even with significant adjustments in the big health care programs, we’ll do well to keep federal spending between 21 and 22 percent of GDP over the next decade. The Clinton-era tax code would bring in 20.6 percent over that period.

Few want simply to return to that code, of course, and for good reason. It’s far too complex, and it’s honeycombed with deductions and exclusions that are poorly targeted and inefficient. Instead, we need fundamental tax reform that yields the same level of revenues. That means some combination of a broader base, higher rates for many taxpayers, and new revenue sources. Forcing the income tax to bear the entire burden of increased revenues is almost certainly a mistake, which is why quiet bipartisan discussions about a carbon tax are taking places—not among elected officials, of course, but including a surprising array of policy experts.

But the bottom line is this: while we can and should ask upper-income Americans to pay significantly more, that won’t be enough to get the job done. America’s middle class will have to chip in as well. When Obama warns middle-income families that they face a post-cliff tax increase of $2000, he’s referring to the gap between what they pay under Bush’s tax code and what they would have paid under Clinton’s. (Although many Democrats have been loath to admit it, Bush cut taxes for everyone, not just the “rich.”) But in the long run, one way or another, the middle class will have to pay something more like Clinton’s taxes, or give up benefits they value highly.

If President Obama wants to set the country on a sound fiscal path, he’ll have to force the Republicans to break the Norquist pledge. And then he’ll have to break his own.