Economic catastrophe might be looming, but that???s not going stop Washington from doing what it does best: politics. Last week, the Republican-led House passed a bill extending all Bush-era tax cuts set to lapse at the year-end. A few days before that, Senate Democrats passed their own bill raising tax rates on the wealthy and preserving the rest of the cuts. Both were merely symbolic, purely political and plenty cynical.
And so the battle over taxes has seen much maneuvering but absolutely no movement. It???s a dangerous game of chicken, as most economists have warned that a failure by Congress to act could undo any of the economic ???recovery??? we???re barely clinging to these days. Marginal income-tax rates and capital gains would jump, dividends would be taxed as income???and that???s just for starters. This state of affairs seems to satisfy both sides because they both believe the broader narrative over the tax fight???the ideological case???needs to be won.
The battle lines are simple: Barack Obama supports allowing lower tax rates for those making above $200,000 a year and $250,000 for couples to expire, allowing him to attack Republicans as coddlers of plutocrats and Mitt Romney as a candidate of self-interest. Romney supports continuing the tax rates for all income levels and, moreover, he has added the promise of further across-the-board tax cuts.
Whatever happens in November, this is a fight, for a number of reasons that Republicans can win.
1. Democrats Are Overestimating
The left often points to the many polls illustrating that Americans support raising taxes on rich Americans. There is no denying it. But what does that mean in substance? Polls that ask a ???yes or no??? question without context can only tell us so much. Take, for example, presidential approval ratings: The important question isn???t ???do you like the president???? but rather ???do you like him less or more than the other guy????
And in a new Gallup poll, Americans were asked to prioritize the president???s agenda. Respondents assigned exceptionally little importance to increasing taxes on the wealthy???so little, in fact, that when given a choice, voters placed it last among all available choices, tied with expanding global warming policy. The top three were: ???creating good jobs??? (92 percent), ???reducing corruption in federal government??? (87 percent) and ???reducing the federal budget deficit??? (86 percent).
So if the Gallup poll truly reflects the mindset of Americans, it???s curious that Democrats made a tax increase the centerpiece of their attack. The notion that around $50 billion of added tax revenue a year, the increase it???s expected to generate, would fix the economy, reduce the deficit or create ???good jobs??? or deal with any of the top prioritized agenda items, seems like a weak central argument for the Democratic Party to make.
2. Voters Are in the Mood to Say ???No???
When Americans do get a direct say on the topic, they???ve consistently been saying ???no.??? While tax hikes on the wealthy, despite the potential economic consequences, might appeal to our innate affection for ???fairness??? (though voters often fail to understand how much the wealthy already pay), voters have been increasingly reluctant to give in.
People will tell pollsters all kinds of things, of course, but since the recent recession began, many state, county and city initiatives that proposed tapping new revenue streams have lost???and often lost badly. A proposed transportation sales tax in Georgia, for instance, was clobbered last week, and it is one in a very long line of tax-hike efforts batted down by voters from Oregon to New York.
Put it this way: In June, an initiative to levy a new tax on cigarettes to pay for cancer research in California failed. The only thing that could make that initiative more appealing to voters would be to throw in a free kitten. Yet, it was rejected.
3. Deal with the Consequences
Sen. Patty Murray (D-Wash.), leading the tax fight for Democrats in the Senate, has stated that unless Republicans concede to hike taxes on the rich, her party would not enter into any compromise that could delay either automatic spending cuts or tax increases.
Voters may remember that this is the same tough-talking Democratic-controlled Senate hasn???t passed a budget since April 29, 2009. Yet, here, for a tax increase on the wealthy, it is willing to risk a second recession. Voters may also remember that Democrats controlled the House in 2008 when they passed a full extension of the Bush-era tax cuts, because, as an assortment of Democrats pointed out, it was a bad idea to raise taxes during a downturn.
At a press breakfast in Washington hosted by the Christian Science Monitor, Republican Majority Whip Kevin McCarthy of California pointed out that there are 139 Democrats in the House who voted to extend all tax cuts and ???86 of those Democrats still reside in the House…If we???re serious about changing this economy and making America competitive yet, eliminate some of the uncertainty yet. You extend [tax cuts] and reform the entire tax code???that unshackles us and lets us compete.???
That???s a compelling argument that is going to be hard for Democrats to match. In the end, it is Democrats who created the ultimatum and people who create ultimatums typically bear the brunt of the fallout. A study by Ernst and Young found that raising taxes on the rich would cost the economy around 710,000 jobs. Few reputable economists argue that a tax increase could help create any private sector jobs???the kind of ???good jobs??? that Americans value.
So the onus will be on the Democrats to convince independents that this is a hill worth dying on. While, conversly, the GOP is arguing for the status quo???a tax rate that has been in place for 10 years.
4. Not Just the Wealthy
While President Barack Obama will continue to argue that the tax hikes aim at billionaires and millionaires who aren???t doing their ???fair share,??? more and more voters will learn that it???s a far broader proposition.
Sen. Charles Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.), arguably two of the highest profile Democrats in Washington, both favored raising the threshold of tax on the wealthy to $1 million rather than the $200,000 range. If stalwart liberals are wobbly on this issue, one can imagine the average independent might not buy it either.
Sen. John Thune (R-S.D.) told Human Events that taxing the rich entails raising taxes ???on almost a million small businesses. More than 50 percent of all [small businesses] that passed through income would face higher taxes and those almost one million small businesses who would be hit with higher taxes employ almost 20 percent of the American workforce.???
Thune is talking about many small and mid-sized businesses that, to avoid double taxation are either sub-chapter S corporations or limited liability corporations. Obama will, at some point, have to make the case that small business owners should pay more in taxes???no doubt, an unsavory position to be in.
5. History with the Republicans
History doesn???t always repeat itself, but, fact is, no post WWII presidential candidate has won the election while making the focus of his campaign the promise of raising taxes.