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The Democratic Tax Retreat


The economic policies of the last four years are being repudiated.

Listen closely to the political debate in Washington these days, and you can hear the rumble of shifting tectonic plates. The economic policies that have dominated for the last four years are slowly being repudiated, and a new paradigm is struggling to emerge—or, more accurately, re-emerge.

That's the larger political meaning of the decision this week by House and Senate Democratic leaders to abandon a vote on the Bush-era tax rates before Election Day. Only a week ago, President Obama and his media supporters were asserting that they had Republicans caught in their class-war pincers: They'd lure the GOP into opposing an extension of lower tax rates for the middle class in order to defend lower tax rates for those making more than $200,000 a year.

In the event, the Democrats have cut and run, lest they get blamed for voting for a tax increase in a slow-growth economy. This is how legislative majorities behave when they've lost the political argument and can sense their days are numbered. They lose their ideological nerve and try to save their own individual careers.

In a pre-Labor Day editorial, we warned Democrats about this result and advised them to extend all of the 2001 and 2003 tax rates across the board ("Democratic Salvage Plan," September 1). That would have denied Republicans a campaign issue while also helping the economy. Instead, Democrats chose to follow Mr. Obama into a box canyon of their own design, and it's hard to see how they get out without dreadful losses.

Democrats will now enter the campaign's home stretch with the threat that all of the Bush-era tax rates could expire on January 1. That means the lowest tax bracket would revert to 15% from 10%, the per child tax credit would revert to $500 from $1,000, and millions of middle class families would pay thousands of dollars more in federal taxes.

Keep in mind that this is the not-so-secret desire of many on the left who think the country "can't afford" to let Americans keep so much of their own money. Peter Orszag has already admitted this since leaving his post as White House budget director. What these Democrats really mean is that they think the only way to pay for their spending plans is by soaking the middle class—because that's where the real money is.

Claiming to tax only the rich has always been more political strategy than fiscal realism. As we wrote in February 2009 ("The 2% Illusion"), IRS tax data show that you could have taken 100% of the taxable income of every American who earned more than $500,000 in the boom year of 2006 and still only have raised $1.3 trillion in revenue. That amount would not have closed the budget deficit in either of the last two fiscal years. Liberals pretend they can finance a European-style entitlement state by taxing only the rich because they know that soaking the middle class is unpopular.

Democrats promise to revisit the expiring tax rates in a lame duck Congressional session after November 2, but no one knows how that will turn out. Assuming they do well on Election Day, Republicans will be in no mood to let Democrats keep tax rates low for only some taxpayers. And if they lose their majorities, liberal Democrats may be in a spiteful enough mood to insist that all of the tax cuts expire. A stalemate is possible that kicks the issue into 2011.

We hear the White House is now floating a compromise that would extend the middle-class tax cuts for four years, and those on higher earners for only two years. We hope the GOP doesn't fall for what is a transparent scheme to make it easier to let the rates on higher earners expire the next time around. If Mr. Obama wants a deal on taxes, Republicans should demand that he cooperate on pro-growth tax cuts, or a tax reform that lowers rates in return for ending loopholes.

Which brings us back to those shifting political plates. When the Pelosi Democrats regained Congress in 2006, they brought with them the spend, tax and regulate policies of the 1960s and 1970s. They had learned nothing from the policy revolution and resulting boom of the Reagan years, which resumed in 1995 after George H.W. Bush and Bill Clinton tried a detour and were themselves repudiated by the voters.

A tapped-out President George W. Bush bent to Mrs. Pelosi's will, and then Mr. Obama rode into town offering a hyper-Keynesian policy mix of public spending and easy money to cure recession and create jobs. Democrats thought they were perfectly positioned to ride the normal rhythms of recovery to a new political dominance.

The problem is that it hasn't worked. The policies of spend, tax and regulate have undermined the recovery, causing capital to flee to Asia or the sideline and employers to forswear or delay new hiring. The American public has listened and watched and is slowly concluding that the hope they placed in these "progressive" policies was mistaken. This political reality is slowly dawning on Democrats, which is why so many of them are now denying paternity for the policies of the last four years.

The solution is a return to the economic principles that rescued us from our last bout of malaise in the 1970s. Republicans and Democrats alike need to be re-educated about those principles. But the first step toward such a revival is repudiating the failed policies of the last four years, as many Democrats are already doing.

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