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How Obama Should Have Sold the Tax Plan

Of all the surprising recent happenings, perhaps most shocking is President Obama’s sudden attack of political laryngitis. The once-gifted orator’s announcement of his tax compromise with Republicans was painful to watch. Not only did the president appear uncomfortable – on the order of someone suffering an attack of gout – he also garbled his message. Instead of selling Americans on his plan to extend and in fact enhance the Bush-era tax cuts, he was defensive and apologetic, feeding the inevitable outrage from liberals eager to steepen our progressive tax structure.

First, he could, and should, have made a strong case that he was delivering just the sort of stimulus long demanded by liberal economists. 

Parts of the $800 to $900 billion package, and especially the cut in social security taxes and extension of unemployment benefits, are expected to provide a significant and helpful boost to demand. Not only did the proposed deal set bond yields soaring, confirming traders’ view of its likely positive impact, the package pushed forecasters across the board to raise estimates of next year’s GDP growth – by as much as half a percentage point. That’s a significant increment to our low-growth projection, and will help the building momentum of this recovery.

Second, he should have made the case that his restraint on raising taxes was a necessary gift to beleaguered states and local authorities. 

Overlooked in the endless argument over extending the Bush-era tax cuts for the wealthiest earners is this: many high income Americans are already being socked with increased taxes, and they likely face further hikes. State and local taxes have been rising across the country over the past several quarters in as authorities desperately attempt to close gaping budget holes. 

The National Governors Association reported that in fiscal 2010 states hiked taxes by the greatest amount in decades as 29 states raised tax revenues by some $24 billion. That may be only the beginning.

According to the Center on Budget and Policy Priorities, 46 states face budget shortfalls in FY2011 as they have suffered the worst revenue decline in history. At the same time that all categories of tax income have fallen, governors have had to cope with rising Medicaid obligations. Consequently, state budget deficits amounted to $174 billion in FY2010 (ending in June), with further shortfalls projected at $160 billion for the current year and $140 billion for FY 2012.

State governments have battled growing deficits partly through cutting expenses, reducing estimated spending in FY 2011 by 8.2% from 2008 levels. Also, the federal government has pitched in over $100 billion in Recovery Act funding, which is now petering out. In fiscal 2012 states are projected to receive some $38 billion less from the Recovery Act than they did this year. In all, the federal government has sopped up some 30%-40% of state budget shortfalls.

Another important tool in closing the gaps has been increasing taxes of all kinds, and in particular on the rich. As reported by the Wall Street Journal in September, at least 10 states have seen fit to boost tax rates on high-end earners. 

California enacted a new special bracket of 10.55% for people earning more than $1 million; the top rate is 9.55% with an additional 1% tacked on for “mental health services.” (With this kind of tax burden, one can understand why such a surcharge might be necessary.) 

At the same time Oregon, New York, New Jersey and Connecticut all boosted the due-bills from the highest earners. This creeping hit to high-income Americans is not new. Since 2000, the top rates have increased in California, New Jersey (from 6.37% to 8.97%), New York (6.85% to 8.97%), Connecticut, Maryland and a number of other states. In all 17 states have boosted income tax rates for high earners. More are likely to follow.

Third, the president should have pointed out that while he disagreed with extending the lower Bush-era rates for the wealthiest Americans, doing so will cost only about $75 billion, or less than 10% of the total tax package. 

Moreover, he should have stressed that while the wealthiest Americans might not spend income saved from the jaws of tax collectors (as liberal economists claim), they will invest those funds. This country needs investment capital – to prop up our battered infrastructure and to fund new businesses. That money does not flow from those collecting unemployment insurance.

President Obama could have presented this stimulus package as a win for an administration determined to rebuild our economy. Instead, he emerges defeated. 

In the end, our president cannot bury his core antipathy towards the most successful in the land. This antipathy for our nation's most successful citizens continues to be a handicap--for him and for the country.

Liz Peek is a financial columnist who writes for The Fiscal Times. She is a frequent contributor to Fox News Opinion. For more visit LizPeek.com.

Liz Peek is a writer who contributes frequently to FoxNews.com. She is a financial columnist who also writes for The Fiscal Times. For more visit LizPeek.com. Follow her on Twitter@LizPeek.