Only in Washington could a politician call keeping tax rates the same a tax cut. But that's exactly what President Barack Obama did in his East Room speech on Monday, trying once again to push a tax hike on high-end earners — an increase that even Senate Democrats rejected a year ago. Plus, Obama's pledge to keep the rates the same has a big, fat asterisk that speaks to the Obama agenda for a second term — a worrisome signal from an incumbent who still has yet to reveal his plans for after November.
First, let's define exactly what Obama and everyone else will reference in this debate. In 2001 and 2003, the George W. Bush administration pushed for and received two tax-rate reduction packages, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The EGTRRA lowered the rates for all income tax brackets, along with other reforms in retirement plan taxes and a small reduction on some capital-gains tax rates. The JGTRRA accelerated the tax-bracket reductions, which were originally supposed to phase in over a period of several years, in part to offset the economic impact of the 9/11 attacks.
These aren't tax cuts, and they haven't been for nine years.
The tax cuts worked as intended, especially the JGTRRA. Within months, the economy soared, and unemployment dropped from a high of 6.3 percent in June 2003 to 4.4 percent in October 2006. Unfortunately, the Democratic-controlled Senate in 2001 forced Bush to agree to a sunset clause that would raise the tax brackets back to pre-EGTRRA rates by the beginning of 2011.
This was a big issue in the 2010 midterm elections. Obama and congressional Democrats insisted on keeping the sunset rule in place, hoping to force Republicans into raising taxes on the upper bracket by keeping the middle-class rates as a bargaining chip. The strategy flopped, however, as Democrats lost 63 House seats in the midterms. Stung by the historic rebuke, Obama and Democrats agreed to a two-year extension shortly after the midterms, averting a massive tax hike.
And a tax hike is exactly what would have taken place. All four of the middle-income brackets charged 3 percentage points more before the EGTRRA and JGTRRA fully took effect in the 2003 tax year. Middle-class families got a real tax cut at that time — plus the ability to plan for the future as the rates were locked in at least until 2010. That helped unlock consumer spending in 2003 and 2004, leading to an economic boost and job-creation bonanza. Americans who see the rates increase at the end of this year will call that a tax hike — and will have less money to spend as a result.
The cut is now almost a decade old for most Americans. However, Obama seems to have difficulty realizing this. In his speech yesterday, he wants to take credit for extending tax cuts — and only for another year:
"And that's why I'm calling on Congress to extend the tax cuts for the 98 percent of Americans who make less than $250,000 for another year."
These aren't tax cuts, and they haven't been for nine years. These are the current tax rates middle-income Americans have been paying for almost a decade. Obama wants to campaign for the status quo, and not even that for long. Later in the speech, Obama suggested that middle-class voters take this deal for now, but that later, he wants a debate on "the entire tax code":
"And then next year, once the election is over, things have calmed down a little bit, based on what the American people have said and how they've spoken during that election, we'll be in a good position to decide how to reform our entire tax code in a simple way that lowers rates and helps our economy grow, and brings down our deficit — because that's something that we're going to have to do for the long term."
Translation: Enjoy those rates while you still have them. Asking to kick the can past the election — again — gives a strong hint that Obama will champion a policy that will change middle-class tax rates in a way that won't win him too many votes. Why not just pledge to keep the middle-class rates where they are, permanently? Republicans have wanted to make the EGTRRA/JGTRRA rates permanent almost ever since they passed into law, and that is still their official position.
An even better question would be why Obama hasn't had a debate on the tax code until now. After all, he has been in office for almost four years. In the first two years, his party controlled both chambers of Congress. He could have easily restructured the income tax rates as he and his fellow Democrats saw fit in those first two years, and Republicans couldn't have done anything to stop it, especially under the rules of reconciliation. Instead of addressing the issue, House and Senate Democrats refused to pass a budget resolution in 2010 to account for their future fiscal policy — and haven't passed one since in the Senate, which they still control.
Finally, this comes on the heels of a bad jobs report for June, the third straight flop for Obama on jobs and the economy. Obama obviously wants to change the subject from the worst post-World War II U.S. recovery, which has produced an embarrassing 65,200-jobs-per-month average over its 37 months, to conduct more class warfare and promote Obama's soak-the-rich populism. However, pushing for tax hikes in the middle of an economic downturn will almost certainly backfire as investors take more steps to shelter income and capital rather than put it to use in job-creating activities and investments. Not only is this latest attempt at a distraction unlikely to last past the next bad jobs report, it's all but certain to guarantee more of them.
Read more political coverage at The Week's 2012 Election Center.