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The High Cost of Dems’ Cheap Populism

Last week, I wrote about the fact that President Obama’s approach to taxes as part of the “fiscal cliff” negotiations is billed as taxing the rich but would end up hurting the poor and possibly deepening inequality. Policies built on the flimsy populism of “fairness”–at least as modern Democrats define it–are quite often devoid of economic common sense. What’s more, the Democrats seem to know this.

The New York Times offers a “News Analysis” today in which it is revealed that the Republicans are right on the merits of most of the arguments, but Obama and congressional Democrats have boxed themselves in by relentlessly demagoguing the issue. Here’s the Times:

The mounting concentration of wealth is even more dramatic. A recent Economic Policy Institute study found that between 1983 and 2010 about three-quarters of all new wealth accrued to the wealthiest 5 percent of households. Over the same period, the bottom 60 percent actually became poorer.

Such figures are why some Democrats argue that even if the economy were to return to Clinton-era growth rates, its poor and middle class could not stomach a return to Clinton-era tax rates, at least not yet.

Why can’t the economy handle going back to Clinton-era tax rates? “In part, that is because the economy is still growing slowly, and tax increases have the potential to weaken it,” the Times explains. So higher taxes would indeed impede economic growth. But the Democrats only expect to protect the non-rich from tax increases for a limited time. They’re coming after the middle class too. The Times continues:

“It’s perfectly reasonable for the White House to begin collecting more revenue from folks who have done by far the best in pretax terms,” said Jared Bernstein of the Center on Budget and Policy Priorities, a former economist for Vice President Joseph R. Biden Jr. “But ultimately we can’t raise the revenue we need only on the top 2 percent.”

Well, you could solve some of the revenue problem by cutting spending. But the Democrats’ long-term strategy is to do the opposite. Republicans often complain that Obama wants a GOP House to cooperate on his terms, in order to essentially make the GOP the tax collectors for the welfare state. And as the Times notes, that’s exactly right:

“The goal is not just to make the tax code more progressive, but also to obtain adequate revenue to finance progressive spending programs,” said Peter Orszag, a vice chairman at Citigroup and a former White House budget director. “Making the tax code more progressive but locking into a vastly inadequate revenue base is not doing the notion of progressivity overall any favors.”

So the left can at least claim that they want your money in order to give it back to you in the form of benefits. It’s for your own good. Except, as the Times notes, it’s not:

The Congressional Budget Office has found that between 1979 and 2007, the top 1 percent of households saw their inflation-adjusted income grow 275 percent. For the bottom 20 percent, it grew just 18 percent, and federal tax and transfer programs also did less and less to reduce income inequality over that period.

To recap: Democrats don’t want to raise taxes on the middle class right at this moment, because those tax hikes would harm economic growth, especially for the middle class. But they do want to enact those damaging tax hikes on the middle class at some point, because they want to increase, not decrease, federal spending in the face of mounting debt and deficits. That might hurt the middle class, but the tax revenue gained from it would be spent in part on federal transfer programs intended to reduce inequality, though they won’t succeed in doing that either.

It’s almost as if near-term political gain and populist theater, and not economics, are driving Obama’s approach to policy.