In Defense of Obama's Big, Populist $1.5 Trillion Tax Plan

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President Obama unveiled his plan to raise taxes by $1.5 trillion this morning, as part of a $3 trillion deficit reduction plan that sets up an end-of-year showdown with Republicans

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The deficit plan unveiled by the White House today is not the best of all possible plans. It doesn't pick low-hanging Social Security reforms. It doesn't outline a plan to fix a broken corporate tax code. It swings for the fences on tax hikes for the rich while bunting on sensible fixes to the rest of the system. It's a political creature designed to stake out a left-of-center position rather than incorporate the best ideas from both sides.

And yet for all these reasons, it might be the best of all possible plans that the White House could deliver. I know this sound tortuous. In the logic of Washington negotiations, it's perfectly straightforward.

Before the strategy, here's the plan in four parts:

SPENDING: About $3 trillion in total cuts. $1.1 trillion in war savings; $1.2 trillion from the debt-ceiling deal cuts with $200 billion in domestic savings on top of the debt-ceiling deal; $580 billion in cuts to mandatory spending including $320 billion in cuts to Medicare and Medicaid; $430 billion from lower interest payments.

TAXES: $1.5 trillion in increases. $1.5 trillion in higher taxes, almost all of which hits the top 2 percent. Half of that sum comes from eliminating the Bush tax cut for the households making more than $250,000; the other half comes from limiting deductions for these same households and closing loopholes that the president discussed in the debt ceiling negotiations

ENTITLEMENTS: $300 billion in cuts to Medicare/Medicaid. No changes to Social Security; provider-side cuts to Medicare and Medicaid that the administration promises won't affect the programs; no change in the Medicare

NEW STIMULUS: The $450 billion American Jobs Act. This plan includes Obama's proposal to combine payroll tax cuts with targeted infrastructure and education spending.

This plan is both highly progressive and highly reliant on the status quo. Two trillion dollars in savings seem to come from doing nothing. More than $1 trillion comes from war spending that was going to decline, anyway. Another $800 billion comes from letting the Bush tax cut expire on the wealthiest households, which is following current law. These two plans would accrue interest savings in the billions.

But in addition to planning on doing nothing, the White House is veering left after it was seen as capitulating to Republicans in the debt ceiling negotiations. With $450 billion in new stimulus and $1.5 trillion in new taxes concentrated on the richest households, this is as populist as we've seen the White House.

The administration is not going to win over many right-of-center moderates with this blueprint. It's certainly not going to win over any Republicans. Two months after dangling Social Security cuts and a new Medicare retirement age to get tax increases from Republicans, the White House is back with a plan that offers higher tax increases without either entitlement reform.

You can read this two ways. First, you can write off the White House as a political cop-out that's more worried about the 2012 election than making serious changes to entitlements. I think that's short-sighted. More complexly, you can see this as a keen strategic play. If Republicans are going to vote for higher taxes, they will need to be seen forcing the White House into some sort of concession on spending or entitlements. If the White House proposes those very concessions in their opening bid, they're not concessions, anymore. They're just the White House plan.

The White House plan doesn't include entitlement reform. But it would be a big mistake to see this blueprint as the end of entitlement reform.  By proposing a tax hike this far to the left of the House of Representatives, it's clearly setting up a sort of policy hostage exchange. The White House refuses to deliver entitlement reform without new revenue; Republicans defeat most of the White House's tax plan; and we end up with moderate savings to Social Security and Medicare with slightly higher effective tax rates on the rich.

That's the long game, anyway. And that's why I think this plan -- as progressive, even "populist" as it seems -- as a necessary step in the road to reasonable deficit reduction. In the (somewhat likely) chance that Republicans continue to fend off tax increases, at least the White House will go down with a plan on paper they can point to on the campaign trail.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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