Plumbing the Carter-Obama Political Equation
Barron’s | By Jim McTague
Labor Day signals the commencement of what looks like the most titanic tax battle on Capitol Hill in three decades, as the GOP argues for a permanent extension of the Bush cuts while the Obama administration, rallying around the redistributionist banner, urges a steep increase in the income taxes that apply to the upper crust—defined by the President’s pencil pushers as persons earning more than $200,000 and couples earning more than $250,000. (This might appear to be a rather low bar, considering that memberships to tony country clubs start at about $100,000. In fact, one need make only $180,000 to be a member of the top five percent of wage slaves, according to the Census Bureau.)
If you are game enough to predict the outcome of the contest then you might want to channel your inner Jimmy Carter, suggests Mark Bloomfield, president of the American Council for Capital Formation.
“There are similarities between now and 1978,” he says. Thus, there’s a chance that Democrats in Congress could pull a surprise move next year and propose a reduction in taxes on savings and investments for all, which would appeal to Republicans. This concession would occur regardless of the outcome of the November mid-term election and regardless of President Barack Obama’s thoughts on the matter, because Congress, in the face of stubbornly high unemployment, will be desperate to spur the economy. It happened before under almost identical economic circumstances when Jimmy Carter was president.
Why will the Democrats wait until next year? Bloomfield says they are restricted by a tight legislative calendar and will elect, in the name of expediency, to extend the Bush tax cuts for one more year—to Dec. 31, 2011. Democrats have been hinting at such a move for weeks.
Bloomfield has been lobbying, now going on 30 years, for a tax system that promotes savings and investment and which permits our corporations to compete overseas. As a result of his round-the-clock crusading, he understands the inner workings of Congress better than most, and has remarkable access, too. The courtly, mild-mannered man with a shock of jet-black hair is the city’s most prominent host, famous for dinners that bring together Democratic and Republican members of Congress, lobbyists, government officials and members of the Fourth Estate for off-the-record discussions of the big issues of the day. (Ben Bernanke was a guest the day before he became the Fed Chairman.) Bloomfield is also known for his expansive, duplex apartment in the city’s Meridian Hill section. The centerpiece of his flat is a den configured like the captain’s cabin of an 18th century merchant ship, which is ideally suited for a man navigating the Capitol’s tricky shoals.
These days, Bloomfield focuses most of his lobbying efforts on Congress, because Democrats there are no longer marching in lock step with President Obama. Déjà vu! Carter in 1978 was moving in the identical direction, and his Congress abandoned him. Carter likewise favored raising taxes on the rich and cutting taxes for the working class to stimulate growth in the midst of a severe economic malaise. He opposed a reduction of the 49% capital-gains tax because he equated that with welfare for the rich. Back in 1978, when the median income was $17,640, one needed $40,000 to qualify for the topmost tax bracket. A cut, Carter thundered, would scarcely yield “two bits for the average American,” Time Magazine reported.
“And somehow in Congress, this got turned around,” says Bloomfield. In the face of rising unemployment, its focus shifted from playing at Robin Hood to the task of job creation. Both the leading economists of the day and Joe Six-Pack understood that lowering taxes on capital would spur the investment required for economic growth, he says. Thus Democrats lent their support to Wisconsin Republican Rep. Bill Steiger, who proposed that they slash the top rate on capital gains to 28%. In what must have been a galling moment, Carter signed the so-called “Steiger Amendment” into law later that year.
Obama’s administration would allow capital-gains taxes on the rich to increase under current law to 25% by 2013, up from 15% today. Taxes on dividends during the same period would rise from 15% to 44.6%. This particular hike upsets the utilities industry, which finds itself facing several trillion dollars in costs to build a smart energy grid and replace its aging infrastructure. Capital costs could spike if wealthy investors are hammered by high taxes.
Bloomfield says Democrats don’t consider capital-gains cuts to be a Republican issue—and therefore something they couldn’t possibly contemplate enacting. Both JFK and FDR viewed low tax rates on capital as beneficial for economic growth. Bloomfield is trying to generate enthusiasm for FDR’s sliding capital-gains tax scale, which reduced the bite the longer you held on to an investment. Both Democrats and Republicans who have heard him talk it up are receptive to the idea, he says.
If Bloomfield’s instincts are right, it’s probably time for Obama to channel his inner Reagan and jump on the capital-gains and dividend tax-cut bandwagon. When Democrats in Congress broke with Carter on tax policy, it made him look weak and out of step; and even though he signed the Steiger amendment, this image stuck, and cost him dearly in his race against Ronald Reagan in 1980. Similar obstinacy by Obama might cost him a second term.