Will Coddling the Middle Class Kill Obama's Plans?

Earlier today I was thinking about the same Lane Kenworthy post Matt Yglesias discusses here. The upshot is that if you want to reduce inequality through redistribution, tax progressivity barely helps. You need to take a huge chunk of GDP in taxes in order to finance progressive spending. The more general, sort of obvious point is that if you want to massively increase government spending, the government needs a lot more revenue. But you can take everything from the rich and you still won’t have enough. So you’ve got to massively increase taxation on the middle class. The best way to do this is through a consumption tax. But Obama keeps reinforcing, again and again, that middle-class tax rates won’t rise, as if this is itself a matter of justice. So where’s all the money going to come from to do all these amazing things? Eventually, it’s a huge increase in taxes for the middle class or nothing. This may not be a big political winner.

The progressivity of the American tax system puts big-spending progressives in a bind. They should want a consumption tax with a huge, wide base. The easiest way for government to devour ever-larger chunks of economic output is through the device of a slow series of very small rate increases on a broad base. The smaller the tax base, the more dramatically you have to hike rates in order to significantly increase revenue. But dramatically hiking rates tends to discourage political buy-in from those who must pay. Indeed, it tends to incite heated resistance. Obama did very well with the rich. But that may not last if he hits them as hard as it looks like he’s aiming to. At the very least, pushback from this very powerful bloc of voters will limit his success in raising rates at the top. Perhaps he’s cagily playing a baseline-setting game, and by announcing large increases, he’ll effectively reduce resistance to small ones, which will look good in comparison. But even the large ones leave him massively short. And government spending cannot be debt-financed forever. And he can only inflate so much of it away.

So Yglesias is right (though he doesn’t quite put it this way). Democratic strategists need to be looking at clever ways for the government to take a lot more money away from middle-class families without thereby making the GOP look golden again. Obama’s been behaving as though he’s much less fiscally constrained than he really is. But by catering to the idea that middle-class taxes shouldn’t ever go up, he’s making it even tougher on himself. Unless he’s in the middle of some kind of ten-steps-ahead rope-a-dope wherein reaffirming the middle class’ right to not pay taxes is a way of softening them up to accept huge tax increases, he may be making a mistake. 

Here’s what I initially said about Kenworthy’s post about revenues and inequality, when I was writing for Free Exchange.