ObamaTax 3.0

September 9, 2008; (WSJ) Page A24

The good news is that Barack Obama said on ABC Sunday that he might not go through with his plans to increase taxes.

The bad news is that the economy has to be mired in recession to avoid the largest tax increase in the nation's history.

Our check of the Dow Jones Factiva database suggests that other than viewers of ABC's "This Week," only three or four newspapers carried an account of Senator Obama's amended tax plan. While it's possible that the story of a deferred tax increase could shock the media into paralysis, we take it as an encouraging sign. The education of Barack Obama continues apace.

For the record, here is what he told ABC's George Stephanopoulos.

Mr. Stephanopoulos: "So even if we're in a recession next January, you come into office, you'll still go through with your tax increases?"

Senator Obama: "No, no, no, no, no. What I've said, George, is that even if we're still in a recession, I'm going to go through with my tax cuts. That's my priority."

Mr. Stephanopoulos: "But not the increases?"

Senator Obama: "I think we've got to take a look and see where the economy is. The economy is weak right now. The news with Freddie Mac and Fannie Mae, I think, along with the unemployment numbers indicates that we're fragile. I want to accelerate those tax cuts through a second stimulus package, get more money into the pockets of ordinary Americans, see if we can stabilize the housing market, and then we're going to have to reevaluate at the beginning of the year to see what kind of hole we're in."

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Even individuals staring down the barrel of Mr. Obama's tax increases should not wish for an economic recession to give them a reprieve. The relevant point is that it was early last year, when the "Bush economy" was still humming, that Senator Obama first proposed pushing taxes sharply upward on "the wealthy," while giving what he calls "tax cuts" (actually they are credits, not rate reductions) to "the middle class."

At the time, Mr. Obama was the long shot in the Democratic Presidential sweepstakes, and it made some political sense to reassure the party's intensely liberal primary voters with class-war boilerplate on taxes.

Under ObamaTax 1.0, he would have repealed all the Bush tax cuts, lifted the cap on wages subject to the payroll tax, put the top marginal rate up to 39.8% and raised the rate on capital gains and dividends to at least 25% from 15% now. The official campaign line was that tax rates really don't matter to economic growth.

Summer arrived, the Clinton challenge was history and with the general election ahead came ObamaTax 2.0. It posited that the top rate on capital gains now would be 20%, described on this page August 14 by economic advisers Jason Furman and Austan Goolsbee1 as "almost a third lower than the rate President Reagan set in 1986." This was progress.

Now with the big vote less than 60 days off and John McCain pounding him as a tax-raiser and pulling ahead in some polls, the Democratic nominee has decided to release ObamaTax 3.0, the most interesting upgrade so far. If the economy is still weak in January, a President Obama might defer all of the planned increases.

Several interpretations of this shift are possible, none of which reflect badly on Senator Obama's political learning curve.

At the bloodless level of simply wishing to win, the Obama camp may have concluded that in the sprint to November it is a losing strategy to be the election's only doctrinaire tax raiser. A tight race tends to focus political minds, and none forget Walter Mondale's catastrophic promise in his 1984 acceptance speech: "Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did."

Beyond this lies the economic reality of jacking up income, investment and payroll taxes on "the wealthy" amid a flat or falling economy. In the standard narrative, these taxpayers exist as fat cats atop hedge funds, banks and megacorporations. Let's toss into the vat the top-tier managers of Fannie Mae and Freddie Mac, the Beltway's own fat-cat sinecure.

The reality is that the creators of new jobs in the economy are more likely to be rising entrepreneurs or filers under Subchapter S, who typically pay taxes at individual rates. Hanging three or four tax millstones around their productive necks in January if the economy is weak will likely produce unimpressive growth and job numbers in the first year of the new Obama Presidency, and likely beyond. That in turn could drag down the Democrats in Congress who will get credit for voting these higher taxes into law.

Thus Mr. Obama's unambiguous answer Sunday to whether he'd insist on his tax increases if the economy is in an official recession: "No, no, no, no, no." It seems Mr. McCain is right that taxes do matter.

Mr. Obama's most ardent primary supporters may not like it, but we'll take the five "Nos" as evidence that Senator Obama may be learning the difference between liberal doctrine and sensible governance.