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The Pick-Your-Poison Paradox

Over at The Daily Beast, Matt Miller looks far ahead — very far ahead — to that point in time when the economy has achieved some semblance of normalcy, and we have the comparative luxury of focusing on paring down the national debt, which of course will have grown significantly by then. Miller’s argument is that a tax increase is inevitable at that stage — and so Obama ought to man up and acknowledge as much:

He may as well get out ahead of it. The drumbeat from the GOP about Obama’s colossal debt, previewed in the offstage budget skirmishes of the last two weeks, will become a primal Republican scream in the midterm elections. So rather than the divert-and-evade strategy, here’s how I would frame the debt issue if I were the president:

“Job one, two, and three is economic recovery,” Obama might say. “For the next three years that means unprecedented deficits to help boost this economy. I wish we didn’t have to run up $3 to 4 trillion in new debt to jumpstart growth—but I make no apologies for doing whatever it takes to get the economy out of the hole I found it in. Once we get past this downturn and back on the path to growth and prosperity, however—and we will—we’ll need to examine ways to ratchet this debt down much faster. The debt numbers in my budget for five or eight years from now are in that sense placeholders until we get through this mess. At that time, my view is that everything should be on the table. But first things first.”

I’m not sure that I agree with Miller — if and when the economy actually recovers, that is when the public would seem to have more patience for a discussion about tax increases. Right now, Obama probably has to conserve his political capital to ensure we can get to that point — and that means talking about lowering taxes, not raising them.

Clearly, however, this is a choice among least-bad options for Obama. As it stands, his budget includes rather large deficits (larger still if you use the CBO’s figures) and he’s taking a lot of flak for that. But, if he purported to balance his budgets but had to increase taxes in order to do so, he’d be taking a lot of flak for that too. So what, we might ask, does the public fear more: the prospect of ballooning deficits or the prospect of higher taxes?

It turns out that the answer is somewhat paradoxical. The public is generally willing to forgo tax cuts in order to balance budgets. An AP-Ipsos poll conducted in November 2004 probably put the question to voters the most directly: “if you had to choose, would you prefer balancing the budget or cutting taxes?” — 66 percent chose balancing the budget. The public is generally not willing, however, to raise taxes in order to balance budgets. A Pew Poll in October 2005, for example, found that 70 percent opposed increasing taxes to reduce that year’s budget deficit, while just 26 percent supported it. Thus, there seems to be a sort of endowment effect in play: if you promise to raise someone’s taxes, the public feels as though something is being taken away from them, and they become very squeamish about it. But they are not so concerned about forsaking future tax reductions that they do not yet have.

It doesn’t take any great leap of insight, of course, to suggest that it’s easier to lower taxes than to raise them. But this is something slightly different: it’s easier to not lower taxes than to raise them. In other words, lowering taxes and then having to raise them again will probably entail a substantial net loss of political capital and is something to be avoided (unless, of course, you can pawn the increase off on the next administration).

One relatively smart thing the White House seems to have done is to bundle their middle-class tax relief with their stimulus package. Since stimulative tax cuts are supposed to be temporary and were billed as such, this will create less of an endowment effect going forward as compared with a standalone tax bill.

There is, of course, one other way out of the dilemma. I’d bet that people are more than willing to raise taxes in order to balance budgets — provided that they aren’t the ones paying them. Raising taxes on the rich is currently quite popular, with more than 70 percent of the public supporting a tax increase on people making $250K or more per year. Obama’s budget already includes an implicit tax increase on the wealthy in the form of phasing out the Bush tax cuts. But he probably has some wiggle room on top of that in the form of a millionaires tax bracket or something else. Given the alternatives, indeed, it’s virtually impossible to imagine taxes on the wealthy not having been increased substantially by the time Obama’s four years in office are up.

Nate Silver founded and was the editor in chief of FiveThirtyEight.