President Obama's Unserious Tax Plans
President Barack Obama's new budget proposal won't be going anywhere in Congress. But the president still has the power to set the terms of conversation as the House and Senate try to reconcile their deeply oppositional visions of reform.
In that regard, the primary cost-cutting ideas Obama proposes -- means-testing Medicare and using chained CPI to calculate increases to Social Security benefits -- suggest sensible progress toward a larger compromise.
His tax proposals, less so.
The budget aims to raise $580 billion in new revenue over a decade. It does so partly by capping exemptions and deductions for those in the top tax brackets. It also eliminates such distortions as the "carried interest" break for hedge-fund managers and a loophole that lets the wealthy take undue advantage of tax-preferred retirement accounts. In principle, this is all moving in the right direction.
Likewise, the new budget reduces the corporate tax rate for most companies to 28 percent from 35 percent by removing deductions and exemptions. This is also probably the best we can hope for in the world of political reality. (It would be better if it were combined with a proposal to move the U.S. toward a territorial tax system. In a perfect world, we would eliminate the corporate-income tax entirely in exchange for taxing capital at the same rate as labor, as we've argued here.)
Unfortunately, the budget also has its share of retreads, non-starters and counterproductive tax ideas that make it a less useful document in the war of ideas.
Old standbys that sound heartening but would do nearly nothing to balance the budget -- such as ending the tax break for corporate jets -- duly make an appearance.
Similarly, increasing the federal cigarette tax to $1.95 per pack to pay for a new national preschool program sounds great. Except when you consider that tobacco taxes are extraordinarily regressive, increase smuggling, and impose costs on a small and dwindling part of the population to pay for a putatively permanent federal program. It's hard to see how this tax is particularly fair. And as the rate of adults who smoke cigarettes continues its inexorable long-term decline, it's even harder to see how the revenue will be sustainable.
The budget also resurrects the so-called Buffett rule, which would impose a 30 percent minimum tax on households with more than $1 million in annual income. Although it may be good politics, this remains a bad idea. It would affect an extremely small number of taxpayers and thus would do little to reduce deficits or inequality. It would illogically let those making, say, $900,000 off the hook. It would worsen the tax code's preference for corporate debt over equity. It reinforces the notion that Obama has it out for those who simply make a lot of money. And it hardly simplifies things.
You could argue that the Buffett rule is harmless posturing, given the unlikelihood of its passage. But it perpetuates the myth that our fiscal problems can largely be solved by imposing ever more onerous taxes on rich people and without making the middle class pay more -- whether through higher rates or reduced deductions -- in the medium-term.
By any fair reckoning, this isn’t true. Middle-class taxpayers have grown accustomed to getting more from the government than they pay for. Unless the population miraculously stops aging, or we agree to make far more drastic cuts to entitlement programs than anyone is now proposing, they will have to pay more.
I don’t like it and neither do you. Sadly, that doesn't change the arithmetic.
(Timothy Lavin is a member of the Bloomberg View editorial board.)