Wednesday, September 1, 2010

The Democrats Have Painted Themselves Into A Corner

  Demagoguery will get you only so far, and the democrats are discovering  that limit with the debate on the soon to expire Bush Tax cuts. They have railed against them for years. They have characterized them as tax cuts for the wealthy. They say Bush rewarded the top two percent of taxpayers, and this was the cause of the deficit. Obama recently said, "it took eight years to get us into this mess," therefore asking for patience for him to get us out. This has to be a reference to Bush's tax cuts, because in reality that was George W. Bush's answer to the recession that he inherited and the crux of his economic policy. He can't be referring to Bush's deficit spending, because he has quadrupled it. The democrats can't really blame him for allowing Wall Street to run a muck and the sub prime mortgage mess, because it was democrats, particularly Chris Dodd and Barney Frank that strong armed  Freddie and Fannie as well as other lenders to lend recklessly. They talk about the cost of the Iraq war, but over 7 years of combat operation in Iraq the price tag is still under what they spent in one fell swoop with the failed stimulus package. 

Tax cuts for the wealthiest Americans has been their refrain. Now they're considering extending tax cuts for those that make under 250 thousand a year. Whoops, is that an admission that the Bush tax cuts were across the board, and they did benefit the middle class? Doesn't the fact that they're even entertaining the idea of extending some, validate the position that tax cuts, not government spending, stimulates the economy? They know as well as anybody that the high income earners are the ones that run small businesses and are responsible for around 80% of all new hires. But, how can they now vote to extend them all when they have non-stop demonized them, as a give away to the wealthy, and have continued to blame Bush for the current state of the economy. The color used to paint themselves into this corner is bright red, and much as been spilled on their now red faces. They are stuck living their long developed demagoguery. How can they extend them for the high income earners when their refrain has been non stop? Some democrats, such as Ben Nelson, and Evan Bayh now favor extending them across the board to stop the economy from double dipping. But, any more defections would undermine their blame Bush strategy going into the midterm.

They're trying to redefine this election from a referendum on them to a choice between the policies of the past that in Obama's words, "drove us into a ditch," and the rapidly discredited Keynesian economic policies that they have porked out on. They know that the economy and jobs is the number one issue on voters minds, with burgeoning deficits and federal spending a close second. They see raising taxes on the wealthy as a way to frame the problem of deficits, and put the GOP on the defensive, but the catch 22 is that tax increases will slow economic growth, and is a losing campaign issue. Remember Obama recently telling the GOP he was going to call their bluff on deficit reduction, and we all know that was code for tax increases. But, of course they won't touch the subject until after November 2nd, even though many democrats are nervous and are considering an about face on the Bush tax cuts.

The problem with the soak the rich strategy is that it doesn't work to increase revenue to the federal government. Arthur Laffers excellent August 2 column in the Wall Street Journal called, "The Soak-The-Rich Catch 22," shows statistically that when taxes are increased on the highest wage earner it actually reduces the percentage of taxes paid by them. Conversely he says, "during the era of ubiquitous tax cuts, income tax receipts for the top 1% of wage earners rose to 3.3% of GDP in 2007, {the last year for which we have data,} from 1.5% of GDP in 1978. Income tax receipts from the bottom 95% of income earners fell to 3.2% of GDP From 5.4% of GDP over the same time period."You can read that column by clicking here. The reason they pay less when taxes are raised is because the rich watch tax policy and have the means to move money to avoid taxes. We all remember John Kerry's yacht story, where he tried to avoid Massachusetts taxes by mooring his yacht in a lower taxed state. The rich do this because they can, and who would blame them? Of course we can point the finger at the hypocrisy of a John Kerry who supports higher taxes as long as he's not paying them. 

So where do we stand? The democrats have demonized  the Bush tax cuts for years. They can't extent them for even the middle class without an admission that they were across the board, which they were.  They can't extend them for the wealthiest Americans even though that would bring some certainty to small business owners and increase employment, because they would have to admit it is stimulative and eat crow for their class warfare rhetoric. They are going into the elections with a slowing economy and nothing they can do to change the dynamic without looking like hypocrites and demagogues, which of course they are. What a pleasure to watch them squirm in their painted in corner. Should their October surprise be an announcement to extend all the Bush tax cuts for the good of the economy and therefore admit they're returning to the failed policies of the past they've so vigorously demonized? We can only hope for the good of the country, but let's not hold our breathe. 
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