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Fix the Tax Code!

Yes, we know we’re tempting fate. But we figure there’s a 50 percent chance Obama will get reelected, and in any case he needs an agenda to campaign on. So we’ve asked a number of TNR contributors to explain what they think Obama should focus on for the next four years—if he wins in November. Click here to read the collected contributions.

Concerns about income inequality and fairness have become such a mainstay of our politics that they can even be felt pulsating through the Republican presidential primaries. Indeed, it was Rick Perry who revitalized the term “vulture capitalism” to attack Mitt Romney, and Newt Gingrich who attacked Bain Capital. In truth, however, this shouldn’t be surprising: The middle class has declined in the last several decades, from 50 percent of Americans to just 42 percent, and people are struggling. For many voters, the upcoming presidential election will come down to one question: Who is the greatest champion of the middle class? If Obama wins in November, he will have done so because the country has rejected the supply-side, trickle-down economics of the Republican Party. He should thus take it as a mandate to pursue a middle-class agenda that reduces inequality and increases opportunity. And the best way to do this is to reform the tax code.

As it happens, shortly after the election Obama will be presented with the perfect opportunity to do so. At the end of December 2012, the Bush tax cuts will expire. So will the payroll tax cut. And on January 1, sequestration of discretionary funds will come into effect—automatically cutting programs like veteran training and employment services by 9 percent, and reducing defense spending by $454 billion. This series of sharp deadlines—including both defense cuts and raised taxes—may finally force Republicans to the table to discuss a balanced plan for deficit reduction.

But any sort of “grand bargain” can’t take as its only priority deficit reduction. To go through an entire election and end up with the plan that the President was ready to offer last August—higher revenues on upper-income Americans and cuts to entitlements—would be depressing to progressives, to say the least. That’s why the President should use the leverage he enjoys in the lame-duck session to actually address the needs of the middle class, with a deficit reduction plan that addresses fairness in the tax code.

The first step would be raising revenues from those who make $250,000 or above, which should be part of any deficit reduction plan. But the more important shift would be addressing the fact that our tax code is, in many ways, upside down, with many of the largest tax breaks disproportionately benefiting the wealthy. Deductions and exclusions are more valuable to those in higher tax brackets, and so the one trillion dollars worth of annual tax deductions currently in our tax code—whether their purpose is to promote homeownership, retirement savings, or investment—provide the largest subsidy to those who need them the least. Obama should push Congress to turn these upside-down subsidies right-side-up by using tax credits instead of deductions, making the benefits of special tax provisions the same for all.

But deductions aren’t the only regressive aspects of the tax code: It’s also stuffed with about $130 billion in annual tax expenditures benefiting businesses or industries. Many of these are indefensible giveaways, such as subsidies for corporate jet owners and drilling incentives for oil companies that already enjoy record profits. Eliminating as many of these as possible should be high on Obama’s agenda.

To be sure, reforming the tax code is not enough. Strengthening the middle class will also require a positive set of policies that create more jobs with decent pay. That means supporting infrastructure by fixing our decaying roads and bridges, building faster high speed rail, and renovating and modernizing crumbling and inadequate schools. It also means hiring back thousands of teachers; ballooning class sizes because of teacher layoffs are not only hurting our economy right now, they are hurting our future competitiveness because our education system is suffering.

But increasing fairness in the tax code is the best place to start. It would not only redress inequality, it would also help reduce the cynicism that drives Americans to think the deck is stacked against them. And that is what will help build a governing majority for Democrats well past Obama’s second term.

Neera Tanden is president of the Center for American Progress.