Sunday Times (London)
July 15, 2012
by Irwin Stelzer
It's easy to blame politicians here in America for their inability to come to some sort of compromise on the problems facing the economy. But politicians respond to voters, and voters here are just about evenly divided on most issues, a fact that is reflected in the more or less neck-and-neck race being run by Barack Obama and Mitt Romney on the road that leads to 1600 Pennsylvania Avenue, that white house that contains the storied Oval Office. Which prompts the candidates to seek some policy that most voters find attractive, something that will wrong-foot his opponent.
China-bashing won't do: the positions of both candidates vary from tougher to toughest, the latter crown moving from head to head with the latest speech. Being for or against Obamacare won't do: voters have decided where they stand on that radical change in the healthcare system, and nothing any candidate can say will cause them to switch their voting preference.
So President Obama has hit on an issue that he sees as a multi-faceted sure winner: tax fairness — or, as John Selden put it in 1689, "equity". Equity, or fairness, Selden pointed out, is in the eye of the beholder. It is "a roguish thing ... according to the conscience of him that is Chancellor". Or president.
In Obama's case, fairness requires that the Bush tax cuts, due to expire at the end of this year, be extended another year for the 98% of families with annual incomes of less than $250,000. Rates on incomes in excess of that would go up from 33% to 36% for families and 35% to 39.6% for individuals, taxes on capital gains would shoot up from 15% to 23.8%, and taxes on dividends would jump.
Obama says it is only "fair" that the wealthiest Americans bear more of the burden of reducing the deficit. Romney responds that the new rates would hit job-creating small businesses, since the profits of many of these enterprises are taxed at personal rates. That, he says, would reduce already anaemic growth and job-creation rates.
This debate is really about Obama's effort to frame the broader debate about which candidate should be granted the keys to the White House.
The president knows that he cannot run on his record. Obamacare remains unpopular, and therefore is barely mentioned, even though he privately regards it as his signature, historical achievement. The unemployment rate has risen, millions of workers have fallen out of the labour force, tens of thousands of people are losing their homes, middle-class incomes are somewhere between stagnant and declining. So if he is to win, he must air-brush the last three years out of the history books.
He knows, too, that the revenue from his plan to raise taxes on the rich won't make a dent in the deficit. The fairness issue is designed to appeal to his left-leaning base and persuade the blue-collar Reagan Democrats, who supported him in 2008 but are now disenchanted, to stick with him rather than switch to an uncaring rich guy who made his fortune at Bain Capital draining cash from companies and shipping jobs overseas.
Romney has not helped himself by being photographed on a fire-engine-red jet ski and "roaring across Lake Winnipesaukee on a powerboat large enough to hold two dozen family members gathered for a week-long vacation at his New Hampshire compound", to quote the Obama-favouring New York Times.
The debate is also about the "fiscal cliff" toward which the American economy is hurtling. Legislation now calls for a recession-inducing year-end toxic mix of tax increases, as the Bush tax cuts and a payroll tax reduction expire, and a mandated reduction in government spending will come into effect. So Obama has positioned himself as trying to avoid another recession by postponing most of the tax rises, but only if Republicans do the "fair" thing and go along with his plan to allow taxes to increase on the wealthiest 2%.
The president wants the Senate, controlled by his party, to vote for his tax plan, and now. That would, he thought, force the Republicans to oppose tax relief for the middle class in order to protect "the rich". He hadn't planned that several members of his own party would be reluctant to vote for any tax increases, especially in states where $250,000 is not considered rich. So the Democratic majority leader in the Senate has been forced to reject Republicans' demands for a vote on Obama's bill, at least until he can whip reluctant Democrats into line behind an embarrassed president.
The Republicans would like separate votes on extending the tax to everyone, followed by another calling for an increase to wealthy taxpayers — a bill many Democrats would not support.
Most Americans won't pay attention to these debates until the traditional beginning of the campaign season on Labor Day, September 3. Then, those who have not already decided which candidate is most likely to get the country back on the right track — two-thirds say we are on the wrong track — will begin to listen to the arguments and size up the candidates.
Most forecasters agree that the state of the economy on election day, November 6, will be what it now is — unemployment above 8%, job creation barely sufficient to keep up with population growth, deficits unsustainable, the middle class under economic pressure, repossessions again on the rise, the fiscal cliff in clear view.
Fortunately for the president, 60% of voters believe he inherited this situation, and he remains personally popular.
Voters will have to choose between Obama, who is promising to improve their condition by expanding government and raising taxes, and a rich challenger with a vision of a private sector, liberated from regulations and benefiting from lower taxes, restoring the American dream. At least they can't complain that they don't have a clear choice between competing visions.
I have not met a single, non-partisan forecaster willing to predict just what path voters will choose, if indeed they register a clear choice.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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