The Real Reason Obama Wouldn't Embrace Simpson-Bowles

Over at Wonkblog, Ezra Klein offers an elaborate theory for why President Obama decided not to back the Simpson-Bowles budget plan. Broadly, Ezra argues that it was all Kabuki—the president knew he would kill Simpson-Bowles if he embraced it, so he hung back and hoped that Republicans would box themselves in on the budget and then come to the President desperate for a Simpson-Bowles-like compromise. Obviously this didn’t work, but that doesn’t mean that openly backing Simpson-Bowles would have worked either. The president’s decision to back away was "tactics, not ideology."

This is all, I think, too clever by half. The reason Obama didn’t back Simpson-Bowles is much simpler: it’s a big tax hike on the middle class. The President made a campaign promise not to raise taxes on families making $250,000 or less—98 percent of all American families. Though he has signed a couple of bills that violate that promise at the edges (raising the cigarette tax and, arguably, imposing an individual health care mandate) he has made a clear decision that it would be against his political interest to endorse any broad-based income or payroll tax increase on middle-income families. He could not endorse Simpson-Bowles because Simpson-Bowles is unpopular.

Instead, the President has focused on campaigning for tax increases on the wealthy. This is a policy that has the twin advantages of being red meat for his base and popular with a large majority of Americans. Liberals, focused on defending the interests of 99 percent, are not showing any particular appetite for a middle class tax increase, even if it goes to fund programs they value. But they love the idea of taxing rich people more.

So I take issue when Ezra describes the difference between Simpson-Bowles and the president’s own budget plan as follows:

Obama’s budget is to the "right" of Simpson-Bowles in that it raises less revenue. But it is to the left of Simpson-Bowles in that collects revenue on a much more progressive schedule. Simpson-Bowles would have raised more revenue without moving the needle much on the overall progressivity of the tax code, meaning that middle-income people would have paid significantly more than they do today. President Obama’s budget raises new revenue solely by taxing the rich, making the tax code much more progressive. And the Obama-Boehner deal never made explicit how the elimination of tax expenditures would have been allocated among income quintiles.

It may be true that, despite the preferences of the base, the president would have been willing to break his campaign promise in order to get a bipartisan budget deal. Certainly, the president is smart enough to understand that current levels of taxation on the middle class are inconsistent even with Republicans’ spending preferences, let alone his own. But since Republicans are even less keen than Democrats on a middle-class tax increase—and because they understand that it is good politics to oppose one—it was never going to work for the president to sit back and hope the Republicans would come to him with terms along the lines of Simpson-Bowles.

I do agree with Ezra that Simpson-Bowles would have failed with or without the President’s support. The reason is simply that the time was not—and still is not—ripe for a fiscal adjustment. Republicans and Democrats will agree on measures that close our long term budget gap only when economic circumstances change such that acting is less painful than not acting.

But the project of achieving that medium-term adjustment is hampered by the fact that nearly everybody in Washington is in denial about the necessity of a middle-class tax increase. There’s a reason Matt Yglesias called restricting tax increases to the top 2 percent "Obama’s worst campaign promise." If that promise was a tactic, it’s not one that leads to an endgame where the budget is sustainable. Eventually, if he hopes to make our long-term budget picture work, he is going to have to break it.

Edit to add: Relatedly, most of what Larry Summers says on tax reform in today’s Financial Times is correct, though I do not share his enthusiasm for taxing capital gains at ordinary income rates. As I wrote for City Journal last year, I’d prefer to maintain the capital gains preference, and would be happy to offset the cost with higher marginal tax rates on high earners of wage income.

This piece originally appeared in Forbes

This piece originally appeared in Forbes