The Middle Class Gets Screwed Again!

Say what you want, Obama may be an economic illiterate but his team can be masterful when it comes to politics. And he managed to get the Republicans to raise marginal tax rates on the “rich” and screw the middle class. At least 77% of Americans will see their taxes go up after this deal, and that is a fact. We should not forget that 75% of the taxes supporting Obamacare will hit the middle class. So much for protecting the middle class. Don't be fooled, the middle class got to keep their Bush tax rates, but they are getting hit by the double whammy of seeing Social Security and Medicare taxes go up by 2 percentage points, and of course, Obamacare.

The silver lining is that it could have been worse. Obama wanted to more than double capital gains taxes, but the rich will see capital gains and dividends go up only to 20%: a minor miracle, but Obama can say now he has soaked the rich. As if soaking the rich will create one new job.

Greg Mankiw observed, “The fiscal deal struck last night makes one thing clear: President Obama must have really hated the recommendations of the bipartisan Bowles-Simpson commission that he appointed. The commission said that we needed to reform entitlement programs to reign in spending and that increased tax revenues should come in the form of base broadening and lower marginal tax rates. The deal appears to offer no entitlement reforms, no tax reform, and higher marginal tax rates. After all the public discussion over the past couple years of what a good fiscal reform would look like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.

The Republicans have a serious problem, namely, they have accepted tax increases and there is no doubt that Obama will ask for even more. For Obama, this is his down payment and there will be no serious entitlement reforms since this will cause a civil war within the Democratic Party. As long as Obama talks taxes and taxing the rich, then he wins the debate. If the debate turns to cutting the budget, then the advantage goes to the Republicans.

The question is whether Boehner a mad scientist, perfectly willing to allow Obama to win round one before slamming the door shut on any further tax increase and turning the debate into tax and entitlement reforms? Or will he simply get taken to the cleaners again?

The reality as Greg Mankiw observed is Obama is the true radical and his Party is not interested in compromise or finding solutions that will prevent America from becoming another Greece or Spain. Boehner ought to pass tax and entitlement reforms similar to Bowles-Simpson and then let Obama respond. Obama has his tax increases, and he has increased spending so we will see five straight years of trillion dollars plus deficits. And the economy is fragile as it is, so any downturn will now be on Obama. He can’t escape responsibility.

As for Republicans, any more retreat could end the GOP's chances of winning 2014 congressional elections and maybe signal the end of the Party as we know it. So it is now high stakes for both Parties and our nation is at risk. At a time when we are witnessing the weakest ruling class, we are entering a crisis period. As for the middle class, their income will go down again this year and now they will pay a minimal 2% more on their income. And who says elections don't have consequences?


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