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Back off, deficit hawks

Yes, you’ve got to crawl before you can walk. But it’s probably asking a lot to expect anyone to be impressed.
That’s the problem of the Obama administration’s tax stance. The administration’s idea, letting the Bush tax cuts expire for the top earners, is a no-brainer at a time when the economy is slowing and the nation’s fiscal health questionable. It is a tiny first step toward a more realistic economic policy.

But Treasury Secretary Tim Geithner beggars credulity when he says, as he did after a speech Monday, that allowing those tax cuts to expire on the top 2% of earners will send the message that the United States is serious about dealing with its deficit problem.

The economy “can withstand” the expiration of the Bush tax cuts for top earners, Geithner said. Forecasters say the move could save $40 billion in 2011, which could be used to help cash-strapped states avoid laying off teachers or otherwise employed to keep the recovery growing along.

So the tax cuts should expire. But at a time when the United States is running trillion-dollar-plus budget deficits and officials such as Fed chief Ben Bernanke are warning of a “structural budget gap that is both large relative to the size of the economy and increasing over time,” does anyone really believe saving $40 billion will swing the balance?

It’s easy to see why the administration doesn’t want to allow the tax cuts to expire for everyone. Unemployment is high and economists sympathetic to the administration’s view worry that money is growing tighter even without an effective tax increase for the middle class. In contrast to the deficit hawks prevailing in Europe, Obama wants to spend now in belief that doing so will preserve the economy’s growth potential — the key to reducing the deficit burden over time.

But it’s going to take more to really persuade anyone that the U.S. is ready to live within its means. At some point, it is going to be necessary for our political leaders to send the message that taxes are going to have to rise — and not just for the rich — if we’re going to keep our fiscal head above water. That will be the reckoning.

Geithner, his own past tax issues aside, is no naif. He knows there’s lots of heavy lifting to be done in coming years, in terms of raising taxes and cutting spending. He of all people understands that the United States, with its huge overseas borrowing habit, needs to make hard choices to bring its economy back into balance before job growth and improving wages return.

Which is why it’s jarring to see him make big claims for what amounts to a baby step.