With Polls Close, Obama Blinks on Taxes

This is a pretty big change for Obamanomics. Economic advisers Austan Goolsbee and Jason Furman, in today's Wall Street Journal, now say that Barack Obama's tax plan will do the following:

1) It will increase capital gains and dividend tax rates, to 20 percent, only for families making over $250,000. Before, Obama was hinting at rates as high as 28 percent for everyone.

2) On the issue of the Social Security income cap, he's now considering a plan that would make folks earning over $250,000 pay in the range of 2 to 4 percentage points more in total (combined employer and employee) payroll taxes. Previously, there were hints at increases of from 6 percent to 12 percentage points.

My thoughts on this:

1) It's smart politics. Previously, McCain could say the Obama plan would raise taxes on everyone who had an investment. Now the tax issue is more purely one of class warfare, where McCain has to defend not raising taxes on wealthier Americans despite a projected budget deficit of almost $500 billion. It's tougher to make the claim that Obama would raise taxes more than he is telling.

2) It's dumb politics because it opens Obama to the flip-flopper charge—he is only changing his plan because the polls are close and the issue was hurting him.

3) McCain will have to do a better job in telling folks why cutting corporate taxes is a direct benefit for workers and highlight the risk of raising taxes in a weak economy.

4) Goolsbee and Furman also trot out the "return-to-Clintonomics" line of defense:

Even as Barack Obama proposes fiscally responsible tax reform to strengthen our economy and restore the balance that has been lost in recent years, we hear the familiar protests and distortions from the guardians of the broken status quo. Many of these very same critics made many of these same overheated predictions in previous elections. They said President Clinton's 1993 deficit-reduction plan would wreck the economy. Eight years and 23 million new jobs later, the economy proved them wrong. Now they are making the same claims about Sen. Obama's tax plan, which has even lower taxes than prevailed in the 1990s—including lower taxes on middle-class families, lower taxes for capital gains, and lower taxes for dividends.

Look, it is not just the level of tax rates, it's the direction. Second, the Clinton tax hikes happened after the economy had built up a tremendous head of steam. When Clinton signed his big tax increase bill in August 1993, the economy had been expanding for nine consecutive quarters—more than two years—and was able to power through the negative economic impact of the hikes.

In 2009, the United States might be just emerging from a nasty downturn, only to get hit by a tax increase. Also, recent research shows that tax hikes may be less harmful if accompanied by spending cuts. Yet Obama is planning huge and specific spending increases matched by often vague spending reductions. Clintonomics was all about balancing the budget. This is not a priority for Obama.

5) McCain might want to consider tax relief that directly targets families, such as a massive increase in the child tax credit. I have raised this issue in chats with McCain advisers, but they haven't seemed too interested in going beyond what McCain's already proposed, doubling the dependent exemption.