2013 Tax Increase: Why the Obama Plan Will Help America

As President Obama settles back into the White House after a fierce campaign, his short-lived honeymoon came to an abrupt end as the "fiscal cliff" looms. Tax policy was a major talking point during this presidential campaign due to radically different notions of what a sound economy looks like. With a slim popular mandate going to the president, one can infer that a slim popular mandate believes that the president's tax plan is better for America.  Are they correct?

President Obama has long supported increasing taxes on the extremely wealthy, a debate that began in earnest with the Buffett Rule. ABC news summarizes other aspects of the president's plan, like extending the Bush tax cuts to families making under $241,900 and reducing the corporate tax rate from 35 to 28%. However, the the Congressional Budget Office estimates that the president's plan will add $2.9 trillion dollars to the federal debt over the next decade.

The mistake that many are making when they interpret these figures is to assume that a tax rate estimated to raise the debt is one that will damage the economy. This is not the case. The fact is that expenditures on social spending will be more than offset if the president's tax policy can generate a spirit of greater equality in the U.S.

In an interview with Der Spiegel, Nobel Prize-winning economist Joseph Stiglitz said, "But even those expenditures are still less than the money wasted by America's private financial sector, and the billions spent to bail out companies from the financial sector. One corporation alone, AIG, got more than $150 billion — more than was spent on welfare for needy families from 1990 to 2006."  If we make the wealthy pay their fair share even symbolically, perhaps we can change the culture of cheating that led to a need for bailouts. In this way, the president's tax plan will generate far more wealth than the alternative.

Stiglitz concludes, "The United States can borrow at close to a zero percent interest rate, we would be stupid not to invest more money and create jobs. And we could also make efforts to ensure that the super-wealthy pay their fair share. We could raise more money in a variety of ways. Look at the mining companies: The government grants them the right to extract resources for far less than it should, but auctions could make sure that they pay appropriately."

It is innovative policy making like this that will allow us to have our cake (social welfare) and eat it too (balance the budget).