Talk in Washington about fiscal targets and deficit reduction has masked a fierce and decades-old ideological clash about taxing the rich that looks set to continue into next year’s presidential election.
Last week, US President Barack Obama promised to cut the US deficit by US$4 trillion in 12 years. His Republican adversaries have promised marginally bigger cuts over 10 years.
Onlookers might be forgiven for thinking Washington’s noxious partisan politics is not that noxious after all, but complete with political jabs and well worn sound bytes about “maxing-out the nation’s credit card,” a real ideological brawl is taking place.
It is a brawl about economics and in particular “trickle down economics” — the theory that lower taxes on the rich gives them more cash to spend in productive ways for the benefit of all.
It is a theory that dominated politics in the 1980s, ebbed in the 1990s, was declared dead in the 2000s and is now being hotly contested as Americans try to figure out how to make their economy purr while shedding their vast debt burden.
Obama is clearly not a proponent of the theory. A key part of his savings plan involves ending some tax breaks for the top 2 percent of earners. That translates into anyone earning more than US$250,000 a year, according to the White House.
Obama’s supporters argue tax breaks for the rich are not affordable given the country’s fiscal problems and the wealthy can afford to pay more, helping retain social programs and allowing for cuts elsewhere.
Conversely Republican Representative Paul Ryan’s plan — which has now passed the House — includes about US$6 trillion in spending cuts, but would only reduce the deficit by just over US$4 trillion.
The extra US$2 trillion in savings — along with some tax reforms — would be used to help pay for lower tax rates, including for the wealthy.
That policy, Ryan argues, helps create a government which “lives within its means” and “keeps taxes low so the economy can grow.”
His plan echoes the thinking of former US president Ronald Reagan, who attributed his series of tax cuts to the boom that was seen in the 1980s, but critics say that boom was in fact just a rebound from an earlier recession and the cuts had little overall impact, except to explode the deficit.
“Most Americans know trickle-down economics is a lie because almost nothing has trickled down,” former labor secretary Robert Reich wrote in a recent blog post.
With deficit cutting at the top of the agenda, whichever ideological path is chosen, economists believe it will have a real impact on the economy.
Rudy Narvas, an economist with Societe Generale, believes Obama’s cuts could shave 0.9 to 3 percentage points off growth each year from next year. The cost of the Republican plan could be higher, shaving between 1 and 3.6 percentage points off growth each year.
In the end the choice may simply come down to politics and age-old assumptions that millionaires don’t vote Democrat and blue-collar workers don’t vote Republican.
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