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A Thatcherite Moment in America

President Obama, in attempting to gain traction just ahead of the midterm election, has homed in his message on taxes – and most especially, on “tax cut for the wealth.” Here is how Obama is framing his argument:

Ninety-seven percent of Americans make less than $250,000 a year — $250,000 a year or less. And I’m saying we can give those families — 97 percent permanent tax relief. And by the way, for those who make more than $250,000, they’d still get tax relief on the first $250,000; they just wouldn’t get it for income above that. Now, that seems like a common-sense thing to do. And what I’ve got is the Republicans holding middle-class tax relief hostage because they’re insisting we’ve got to give tax relief to millionaires and billionaires to the tune of about $100,000 per millionaire, which would cost over the course of 10 years, $700 billion, and that economists say is probably the worst way to stimulate the economy. That doesn’t make sense, and that’s an example of what this election is all about.

Let’s examine what the president said, starting with this observation: Obama’s sudden interest in the pernicious effects of large deficits is curious. There is no apparent limit to what Obama is willing to spend – yet when it comes to taxes, and almost only taxes, the president professes to be alarmed about the deficit. With that in mind, here’s a useful reference point: the $700 billion over 10 years that Obama is so eager to save is considerably less than Obama’s first (failed) stimulus package, which alone is estimated to have cost more than $860 billion. It would help Mr. Obama’s credibility if, in opposing taxes on fiscal grounds, he was not the most profligate president in American history.

Second, according to the Congressional Budget Office, the cost for extending the Bush tax cuts to married taxpayers with income below $250,000 and single taxpayers with income below $200,000 – which Obama supports – would reduce revenues by almost $2 trillion over the 2011–2020 period. If Obama’s argument is that he should oppose tax cuts because of their adverse effect on the deficit, then presumably Obama should oppose extending any of the Bush tax cuts he has demonized for the better part of three years. Instead, Obama favors extending them to individuals making less than $200,000 per year.

Obama cannot have it both ways. He cannot on the one hand castigate Bush’s tax cuts as reckless, irresponsible, and ineffective while at the same time extending them for all but the highest income earners.

Third, Democrats assert that the Obama tax increase will hit only 3 percent of small businesses. “There aren’t 3 percent of small businesses in America that would qualify for that tax cut [one for families making more than $250,000],” Vice President Biden has said. Speaker Nancy Pelosi has chimed in as well, declaring that the tax increase on higher income earners would exempt “97 percent of small businesses.” In fact, it will hit fully half of all small-business income, since 85 percent of small-business owners are taxed on profits at individual tax rates.

Twenty months into his presidency, Barack Obama’s problems extend far beyond this particular tax debate. His problem is, in my estimation, conceptual and philosophical. He is trying to spur growth through extravagant government spending, which he believes will increase demand with its magic “multiplier effect.” If that theory worked, of course, we would not be experiencing economic deceleration with unemployment stuck at nearly 10 percent, the collapse of sales of new homes earlier this year, consumer confidence at an alarmingly low level, a “recovery summer” that saw us lose more than a quarter of a million jobs, and economic growth that is far lower than past post-recession recoveries. Yet Obama continues to double down, as if unchecked government spending, onerous new regulations, and higher tax rates on small businesses and our most productive workers is the road to prosperity.

The president is quite wrong about all of that – and it may be that Obama’s failures, for all their economic and human cost, serve a useful pedagogical function. Obama is reminding people, in fairly vivid ways, what works when it comes to economics – things such as rewarding effort and enterprise, recognizing the importance of incentives, creating certainty and stability that encourages investment and entrepreneurship, and honoring success and achievement.

In that sense, we might be reaching a moment similar to the one Margaret Thatcher faced when she was leader of the Opposition in Great Britain. The failures of the “old” Labour government were obvious to almost everyone – and that created a moment for Thatcher to become prime minister and for Thatcherism to take root.

“Where the state is too powerful,” Mrs. Thatcher told the Zurich Economic Society in 1977, “efficiency suffers and morality is threatened. Britain in the last two or three years provides a case-study of why collectivism will not work. It shows that ‘progressive’ theory was not progressive. On the contrary, it proved retrograde in practice. This is a lesson that democrats all over the world should heed.”

“Yet I face the future with optimism,” Thatcher went on to say. “Our ills are creating their own antibodies. Just as success generates problems, so failure breeds the will to fight back and the body politic strives to restore itself.”

It looks to me like we are seeing something similar taking place in America today. We’ll know more in seven weeks.



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