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Long ideological war underpins US budget battle

17 april 2011, 12:54
Talk in Washington about fiscal targets and deficit reduction has masked a fierce and decades-old ideological clash about taxing the rich that looks set to continue into the 2012 presidential election, AFP reports.

This week President Barack Obama promised to cut the US deficit by $4 trillion in 12 years. His Republican adversaries have promised marginally bigger cuts over 10 years.

Onlookers might be forgiven for thinking Washington's noxious partisan politics is not that noxious after all.

But complete with political jabs and well worn sound bytes about "maxing-out the nation's credit card," a real ideological brawl is taking place.

It is a brawl about economics, and in particular "trickle down economics": The theory that lower taxes on the rich give them more cash to spent in productive ways, for the benefit of all.

It is a theory that dominated politics in the 1980s, ebbed in the 1990s, was declared dead in the 2000s and is now being hotly contested as Americans try to figure out how to make their economy purr while shedding their vast debt burden.

Obama is clearly not a proponent of the theory. A key part of his savings plan involves ending some tax breaks for the top two percent of earners. That translates into anyone earning over $250,000 a year, according to the White House.

Obama and his supporters argue tax breaks for the rich are not affordable given the country's fiscal problems, and the wealthy can afford to pay more, helping retain social programs and allowing for cuts elsewhere.

Conversely Ryan's plan -- which has now passed the House of Representatives -- includes around $6 trillion in spending cuts, but would only reduce the deficit by just over $4 trillion.

The extra $2 trillion in savings -- along with some tax reforms -- would be used to help pay for lower tax rates, including for the wealthy.

That policy, Ryan argues, helps create a government which "lives within its means" and "keeps taxes low so the economy can grow."

His plan echoes the thinking of president Ronald Reagan, who attributed his series of tax cuts to the boom that was seen in the 1980s.

But critics say the 1980s boom was in fact just a rebound from an earlier recession and the cuts -- which disproportionately helped the rich -- had little overall impact, except to explode the deficit.

"Most Americans know trickle-down economics is a lie because almost nothing has trickled down," former labor secretary Robert Reich wrote in a recent blog post.

With deficit cutting at the top of the agenda, whichever ideological path is chosen today, economists believe it will have a real impact on the economy.

As a rough estimate Rudy Narvas, an economist with Societe Generale, believes Obama's cuts could shave 0.9 to 3.0 percentage points off growth each year from 2012.

The cost of the Republican plan could be higher, shaving between one and 3.6 percentage points off growth each year.

Still, given the span of those estimates, in the end the choice may simply come down to politics and age-old assumptions that millionaires don't vote Democrat and blue-collar workers don't vote Republican.

Indeed, both sides appear keen to define exactly who the richest top two percent are in ways that might appeal to their base.

Obama paints the top two percent as people like him. With a healthy presidential salary of $400,000 and millions of dollars more each year from book royalties, Obama says he -- and his fellow millionaires -- can afford to pay a bit more.

But Ryan and his Republican allies argue those earning over $250,000 include a great many small business owners and couples filing tax returns jointly.

Experts say both may be partially right -- thanks in part to a vagary of the US tax system many "mom and pop" firms do file taxes as individuals rather than corporations and the rich really are richer than everyone else.

By Andrew Beatty

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