I believe President Obama genuinely opposes the sequestration spending cuts now going into effect. I don’t believe the cynics who think he secretly welcomes the spending cuts as long as he can blame them on Republicans.
But if the President really wanted to prevent sequestration, he made a strategic mistake back on January 1, when he agreed to make permanent most of the so-called Bush tax cuts which had been scheduled to expire automatically.
President Obama claimed $600 billion in new tax revenue from the rich over 10 years from his fiscal tax deal. But compared to what? That’s new revenue only compared to what would have happened if all the Bush tax cuts had been extended, something that was never going to happen, as the President himself guaranteed.
As a result of the January deal, the rich saw their tax rate on corporate dividends permanently reduced to only 20% from 39.6% under President Clinton, and they shared in the tax cuts on income under $400,000. The Congressional Budget Office actually scored the fiscal tax deal as INCREASING federal deficits over 10 years by $3.9 trillion compared to if it had not passed.
So much for deficit reduction and finding new net revenue.
If instead, President Obama had allowed all the Bush tax cuts to expire on December 31, he would have put himself in the strongest possible position for a grand bargain on taxes, spending, and the debt ceiling. Republicans would be incentivized to support tax cuts from the higher restored Clinton-era tax rates. And increased tax revenues would have reduced some of the political pressure to cut spending to slow deficit growth.
While everyone claims to favor simplification and reform of the tax system, the January fiscal tax deal resurrected mind-boggling tax complexity including phase-outs of the personal exemption and itemized deductions for certain taxpayers. There was no constituency for these phase-outs. There were no lobbyists pushing for them. The only supporters were politicians trying to find some tax revenue enhancements without further increasing tax rates. These phase-outs would be a top target of any true tax reform.
Having made the expiring Bush tax cuts permanent for 98% of taxpayers, and allowing even the top 2% to keep some, but not all of those tax cuts, Republicans have little incentive to head off cuts in federal spending which they advocate as policy. The January tax compromise they negotiated with President Obama enabled Republicans to be intransigent on spending cuts, even as they shed crocodile tears over the details and methodology of sequestration.
So the automatic spending cuts of sequestration have begun, and are likely to proceed for awhile with no prospects for compromise on the horizon. But I doubt that the consequences for the economy will actually be as dire as predicted by the Obama administration.
The stock market is near record highs. Clearly investors do not see 2.4% sequestration cuts from a $3.5 trillion federal budget as a major threat to the U.S. economy. We will have to adjust to the mandated across-the-board spending cuts of sequestration. And who knows? Limiting federal spending might prove to be good for us.