Higher Taxes Are Coming, As They Should

Upon hearing George H.W. Bush utter his “read my lips, no new taxes” pledge at the 1988 Republican National Convention, the chairman of the House Ways and Means Committee phoned Bush’s campaign manager.

“What are you doing?” an exasperated Dan Rostenkowski, the burly tax writer, asked campaign manager James A. Baker III.

For years, Rostenkowski had urged Washington to enact tax hikes and spending cuts to reduce the soaring budget deficits of that time. He knew Bush’s “no new taxes” pledge would greatly complicate any such effort if Bush won the presidency, which he did.

Baker’s reply? “We’re going to elect a president of the United States,” he said. “We’ll talk about that after he’s elected.”

Yes, no-tax pledges can be effective on the campaign trail. Ronald Reagan won re-election handily in 1984 after hammering Democrat Walter Mondale for pledging to raise taxes to reduce the deficit. Bill Clinton won the presidency in 1992 after promising to raise taxes only on the very rich.

Barack Obama issued his own no-tax pledge. While running for president last year, he promised not to raise taxes on anyone earning up to $250,000 a year, which would exempt 98 percent of Americans. When his economic advisors recently suggested he’s open to broader tax hikes to reduce our record-setting deficits, the president ordered his press secretary to make clear that he will do no such thing.

That will only complicate matters further when Obama eventually bows to economic reality and decides to raise taxes, as he surely will – just as his predecessors did.

Reagan raised taxes several times after 1984, Clinton raised them on Americans across the board, and, most famously, Bush raised them in 1990, crafting a deficit-cutting deal with Congress that helped move the budget from huge deficits to record surpluses by the late 1990s.

Obama will do the same. Eventually, he will raise taxes on middle-class Americans simply because, facing the challenges at hand, he won’t be able to fulfill his no-tax pledge and govern effectively. Here’s why:

First, we’re bleeding red ink.

Even after the economy recovers, we face deficits that could average about $1 trillion a year in the coming years and never dip below an economically harmful 4 percent of Gross Domestic Product.

Our major lenders, like China, may not keep buying Treasury securities in the same quantities as they are today. They’re already nervous that we’ll print more money to pay our bills, which will cause inflation to rise and their investments to shrink in value.

That’s why top administration officials have assured the Chinese that we will protect their investments and reduce our deficits. Nevertheless, our major lenders may look elsewhere simply to diversify their dollar-heavy portfolios.

At that point, we would have to raise interest rates to entice others to lend to us. That would threaten our economic recovery – and that’s something that the president, with hopes of reelection in 2012, would want to avoid.

Second, we can’t cut our deficit enough without raising taxes.

What’s mainly driving our long-term deficit is the growth of Medicare, Medicaid and Social Security, due to soaring health care costs and the emerging retirement of “baby boomers” who will become eligible for those programs. Americans won’t support big enough cuts in those programs alone to reduce the deficit.

Third, we can’t raise taxes just on those earning over $250,000.

Yes, those who are doing relatively well can afford to pay more, perhaps lots more. But there simply aren’t enough well-to-do Americans to raise taxes just on them and make a necessary dent in our deficit.

Fourth and finally, we can’t even address unmet needs without raising taxes broadly.

Congress is stalled on a host of issues regarding health care, not the least of which is how to pay for the $1 trillion or so in upfront costs. Lawmakers don’t want to raise taxes broadly to finance the effort.

But if they raise taxes only on the wealthy to finance health reform, they’ll be hard-pressed to soak the rich more for deficit reduction. At that point, the middle class will be an even more unavoidable target.

So Obama will eventually break his pledge. If it’s any consolation, he’ll have something in common with several of his recent predecessors.