When did President Obama change his mind on the wisdom of raising taxes in an economic downturn? And, perhaps more important, if the U.S. economy slipped back into recession, would the president abandon his proposals to raise taxes on the wealthy?
In the summer of 2009, Obama said in an interview with NBC’s Chuck Todd that raising taxes in a recession “would just suck up—take more demand out of the economy and put business further in a hole.” Raising taxes in such a downturn, the president said, is “the last thing you want to do.”
A study last year by the Federal Reserve found that two consecutive quarters of GDP growth below 2 percent results in a recession 48 percent of the time. In the first quarter of 2012, the U.S. economy grew at 1.9 percent. And it’s slowing. (See this comprehensive round-up of second quarter growth projections by Jim Pethokoukis.)
With the president’s announcement this morning that he is recommitting himself to raising taxes on the wealthy, an obvious question arises: Why is raising taxes during a recession the last thing you’d want to do, but raising taxes in an economy moving towards negative growth such smart policy that it merits its own East Room announcement?
There is little doubt that raising taxes on the wealthy would slow economic growth further. In the 2010 version of this debate, during the “fiscal stalemate” of that summer, Peter Hooper at Deutsche Bank looked at the possible effects on growth of various policy proposals. He projected that the U.S. economy would slow 1.5 percent if the Obama administration’s preferred plan – which raised taxes on the wealthy – prevailed, but only 1 percent if Bush tax cuts were extended across the board, as Republicans wanted.
The answer, of course, is politics. Obama is running a campaign designed to energize the base of his party and to depict Mitt Romney as an out-of-touch rich guy. And every day the dominant discussion of the campaign focuses on “the rich,” voters are reminded that Romney is one of them and they’re not focused on Obama’s increasingly indefensible record.
So what will Obama do if the economy does, in fact, slip back into recession? Will he still raise taxes?