Obama’s pivot

Several weeks ago, I asked whether Obama would change tactics and get, well, angry. The budget fight in the first half of the year and then the acrimonious debt ceiling debate in July/August left Obama severely weakened, with job approval numbers at all-time lows. The blame lay squarely with Republicans, but Obama’s disastrous negotiating tactics and lack of control over the narrative did not win him any fans. Many astute political observers asked: Why was he compromising? They aren’t interested in anything he has to propose. He might as well get tough.

In his early-September joint session with Congress, Obama revealed his jobs plan, the American Jobs Act, perhaps his last real attempt at putting a dent in joblessness before next election. He brought it forth with a spirited speech and the kind of no-nonsense attitude that many have been begging from Obama for over a year now. The plan itself was larger than many had expected (about $450 bn. vs. $300 bn.).

I want to first talk about the timing and meaning behind the American Jobs Act. Some observers more optimistic than me have said that the initial response from Republicans seemed positive and that there was a chance for progress on the bill. I don’t really see it that way. James Surowiecki and I tend to agree on such matters:

It’s not that the Republican approach is popular: one recent Bloomberg poll found that forty-five per cent of those surveyed think congressional Republicans are responsible for the gridlock in Washington. But it seems to be working: for the past year and a half, the Party has consistently gone for a do-nothing approach and voters have consistently rewarded it.

At this point, Obama has to have learned his lesson that the Republicans are not interested in passing anything. They feel emboldened, if anything. Their initial response to the AJA was cautious for political reasons as they measured the public reaction, but it does not mean his bill will have any chance of passing the House. Meaning: Obama proposed the AJA understanding that it would probably not be passed. So why did he bother? There are several reasons. It’s better than simply doing nothing, and there is always the chance that certain portions of the legislation make it through, like the extension of unemployment benefits and the payroll tax, though at that point it wouldn’t likely amount to much in terms of real stimulus to the economy. But the primary motivation, I believe, is political. Obama now knows he must run against a do-nothing Congress, and he is trying his best to expose the intransigence of Republicans to the public. His goal (and it is a good one) is simple: show that the Republicans are unconcerned with the economy, and that they are the ones blocking progress. He wants the public to understand that the Republicans are happy at the idea of 9% unemployment going into the 2012 election.

It is under these circumstances that Obama released his long-term budget plan about a week ago. Perhaps the most controversial part of it was the so-called “Buffet Rule”, a nod to Warren Buffet’s August Op-Ed, “Stop Coddling the Super-Rich”. From the OMB:

5. Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code

How exactly do they plan on doing this? Limiting tax deductions on high-earners, letting the higher-income Bush tax rates revert back to Clinton levels, and a few other measures. This is all good and well, and again, this is mostly effective political positioning for the next election. The idea is to show that the Republicans want to balance a budget without raising a dime of revenue from millionaires. Since Obama is articulating his vision of a progressive tax system moving forward, many on the center and left are also glad that Obama is finally drawing a line in the sand. If Obama continues to make these points in public, they will likely stick.

But it’s a bit disappointing as a plan in some respects. Buffet’s Op-Ed identified capital gains as the main reason why very rich individuals manage to pay a lower effective tax-rate than normal folk. And there’s no attempt at raising the capital gains rate for anyone (with some exceptions). Part of the hesitance is due to the fact that you are raising taxes on investment, and for whatever reason, claims that it “kills jobs and investment” have stuck over the years, despite the fact that prior to 1997, capital gains were taxed at the same rates as income. And that’s what we need again. James B. Stewart has more:

The notion that low capital gains tax rates are a good thing because they promote investment, lead to job creation, encourage people to sell assets without fear of tax consequences and actually raise total tax revenue is so entrenched in both parties that the idea of equalizing capital gains and ordinary income rates is barely mentioned or, when it is, is quickly denounced. It’s become a third rail of tax policy and electoral politics. “It’s now so woven into standard thinking that it’s become a cultural norm,” a prominent hedge fund official told me this week.

Proponents of lower — even zero — capital gains rates have some academic research and statistics to support their claims. Still, there’s no doubt that the root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary.

Is that so unthinkable? It does seem intuitive that lower taxes and thus potentially greater rewards would encourage risk-taking and investment, and surely at some rate high taxes can discourage any endeavor. But even some hedge fund and private equity officials concede that the argument for lower capital gains rates rests more on faith than science. “I’ve seen study after study that says lower capital gains rates have no impact on behavior,” the hedge fund official told me.


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