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Will Obama Really Raise Taxes?

By Marisa Rindone

Photo of Senator Barack Obama by Eric Thayer/ Rapport.

You have to admire the flexibility of conservatives. They love the free market, until there's a massive government bailout of banks. They say you can't possibly raise taxes when the economy is bad. But when the economy is good, they say you can't raise them either, and really you have to cut them. In 2000, George W. Bush argued for tax cuts because of the surplus, saying that taxpayers were being overcharged.

As Tuesday's election approaches, lots of conservatives are freaked out that Barack Obama is going to win big and then raise taxes, which they predict will make the economy much worse. It's true that raising taxes in a recession not only goes against conservative philosophy, but the basic tenets of Keynesian economics that says you should cut taxes and spend more in a recession. So what will Obama do? Will he continue with his plans to raise income taxes on wealthier Americans and small businesses earning more than $250,000 annually, coupled with a cut for lower-income earners? Will he raise capital-gains taxes on wealthier earners?

My bet is that he's going to have to modify his plans slightly. Whatever majority he garners should he win, it's not going to be one that's eager to hike taxes. Bill Clinton had almost 60 Senate Democrats in 1993 and barely got his tax hikes through. I'm not sure it's going to be that much easier this time, even with a bevy of Democrats. Of course, Obama just has to let the Bush tax cuts expire, but since he wants to keep them in place for lower-income workers, he still has to pass something. Watch for the top tax rate to go up a tad, but any increase in capital gains taxes are a harder sell. There's going to be too much market volatility and too much organized interest against those hikes.

Part of the reason that Obama should be willing to abandon some of the tax hikes is not that he'll cut spending, but because no one is really that concerned with a deficit that could rise to $1 trillion this year. Fighting the deficit is totally out of fashion at the moment, so why should Obama stick by pay-as-you-go rules when everyone else is flooding the economy with borrowed money? I suspect Democrats are tired of the now familiar pattern where Republicans run up the deficit, then Democrats come in and clean it up, and then Republicans return promising tax cuts. Why not just be a borrow-and-spend Democrat instead of a tax-and-spend one? Surrounded by the likes of Paul Volcker, Jason Furman, Gene Sperling, and others, he won't totally throw caution to the wind. But he'll find some of his tax hikes less appealing when he gets into office.

Flip-flopping is derided in modern politics. But flexibility is not always a sin. Franklin Roosevelt famously ran for president promising a balanced budget and decrying Herbert Hoover's deficits. He obviously changed his mind in office and built the New Deal as an improvisational riff, promising "action" above all else and "bold, persistent" experimentation.

I'm not entirely sure what Obama will do in office. But while John McCain tries to portray him as eager to raise taxes more than he said he would, my guess is just the opposite will happen. He'll close loopholes, coax the top income tax rate up a bit, but not go on a wholesale hike in taxes. Bill Clinton was elected promising a middle-class tax cut and quickly abandoned it after being elected. Obama won't make that mistake. He'll keep those cuts and find the money somewhere else, even if he has to borrow it.

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Full post as published by Portfolio.com: Capital on October 30, 2008 (boomark / email).