Why Obama Will Wipe Out Tax Breaks for the Wealthy

Fresh off a victory over the Republicans on the payroll-tax-cut extension, President Obama can begin to set his long-range sights on another high-stakes game of strategic maneuvering and manipulation: How to deal with former President George W. Bush's tax cuts, which are set to expire at the end of the year.

SEE ALSO: What the Payroll Tax Cut Extension Is Worth

Barring a sharp, unforeseen downturn in the economy, Obama is poised to let the Bush tax cuts for the wealthiest Americans expire at the end of the year, ushering in his era of "austerity lite."

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Burned once by Republicans in Congress who didn't follow through on a good faith effort to compromise after Obama extended the Bush tax cuts more than a year ago, the president can gain nothing politically from doing another deal. All that would do is infuriate the hard-core liberals in his base, who already think he has sold them out too many times. Obama is tired of that family feud.

Facing his last election, Obama has nothing to lose, other than leaving a legacy that he failed to keep one of his biggest campaign promises: to end tax cuts for the wealthy. And what do the Republicans really have to offer him anyway?

The GOP can't even propose rescinding politically unpopular tax breaks for corporate jet owners or Cayman Islands tax shelters without facing the wrath of Grover Norquist, viewed as an antitax bully by some in his own party. He has threatened to find a primary challenger for any Republican lawmaker who dares to raise taxes or eliminate tax cuts.

Obama, of course, does not fear political threats from Norquist or his Americans for Tax Reform organization -- they'd be against Obama no matter what. Instead of deep cuts, his new budget invests in short-term job growth and manufacturing/technology innovation. The spending plan is loaded with stimulus, from retrofitting and renovating schools to rebuilding highways, rails and runways.

Arguing that now is not the time for federal austerity, Obama is rejecting the Barro-Ricardo equivalence theorem, which posits that people don't spend because they fear the government is racking up debt they'll have to pay down the road. There simply is no evidence to support tea party-led claims that slashing government budgets will spur private sector business investment and job creation.

That said, forget about the new budget. It's written on a whiteboard, sure to be wiped away by Congress fairly quickly. Even Senate Majority Leader Harry Reid (D-NV) has said he doesn't plan to bring a full federal budget to the floor of the upper chamber. Instead, he'll opt for appropriations bills that will carve up the budget into more easily politically digestible pieces.

The president's budget is really just a populist trap: He will claim victory if any of its prime elements are approved by Congress, and will surely label Republicans as obstructionists for whatever they scuttle from his proposal.

One key question is whether Republicans have wised up to Obama's game plan. The GOP retreat on the payroll tax cut may be a sign that Republicans in the House are learning to accept reality. The fact is, the tea party agenda runs contrary to the will of the majority of Americans, including fiscal conservatives who don't want to see slash-and-burn politics force another dip in the Standard & Poor's credit rating.

If GOP leaders have finally figured out how to play the game against an incumbent president, they may be able to level the playing field and score some points against him before Election Day.

But if Republicans return to business as usual and don't present a united front, Obama will remain in the driver's seat.