Obama Takes Aim at Tax `Targets,’ Fires Blanks: Caroline Baum

Sept. 23 (Bloomberg) -- Two weeks ago, President Barack Obama unveiled his $447 billion plan to put Americans back to work.

Eleven days later, he told us how he’d pay for it: $1.5 trillion in tax increases over 10 years and $3 trillion in spending cuts -- on top of the $1 trillion already agreed to in last month’s Budget Control Act.

He outlined the principles of a comprehensive tax reform that would lower rates, broaden the base, cut “inefficient and unfair” tax breaks, encourage job creation and reduce the deficit. In other words, every economist’s dream.

Then he went on to cherry-pick the targeted tax loopholes he wants to close and take aim at high-income earners for tax increases.

Thus did Obama’s tax reform take on a decidedly populist cast. The president’s “Buffett Rule,” an idea without specifics, would ensure that millionaires pay higher taxes than the middle class (as a group, they already do). Obama would let the Bush tax cuts expire for Americans making more than $200,000 a year ($250,000 for households) and limit their itemized deductions, be they for charitable contributions, mortgage or tax-exempt interest, or employer-sponsored health care.

In his quest for fairness, Obama may end up taxing those he wants to help. As the editors at Bloomberg View noted in an editorial this week, the diminished appeal of municipal bonds, if their tax status changed, would raise borrowing costs, leading to higher taxes, reduced services and less money for the state and local infrastructure projects the president loves to tout.

F in Economics

In economics, this is called the law of unintended consequences. Somehow Obama managed to spend 12 years on the law school faculty at the University of Chicago without absorbing any of the school’s free-market zeitgeist.

The president’s plan, or proposal, or whatever you call an outline of lofty goals with few details, is titled, “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.”

The title is misleading, and a more accurate subtitle would be: “The President’s Plan to Spend Now and Pay for It Later.” In an effort to deflect criticism and avoid the appearance of inconsistency -- Obama previously advised against raising taxes when the economy is weak -- the White House website lays out a few facts:

“Fact: The President’s plan does not raise anyone’s taxes in 2011 or 2012.” Instead, “all measures to raise additional revenue -- including fundamental tax reform -- are effective starting in 2013.”

Create Success

Sound familiar? “Pass this plan now” (the spending part) so we can spend money “without adding a dime to the deficit.” Uh-huh. Any time a politician tells you that, you know he’s flat-out lying.

In the meantime, those inefficient loopholes have to go. Here Obama gets specific, targeting targeted tax breaks for oil and gas companies and for corporate jet owners, more for their symbolic significance than their revenue-generating potential.

By all means, let’s get rid of the deductions and credits for oil and gas producers. The U.S. government shouldn’t be subsidizing these companies. Nor should it subsidize any other companies, including renewable energy producers: companies like the solar-panel manufacturer Solyndra, which filed for bankruptcy two weeks ago and laid off 1,000 employees.

“Obama says he wants successful people and companies to pay more,” says Joe Carson, head of global economic research at AllianceBernstein. “A better strategy is to create more successful companies.”

Capital Invitation

To do that, the U.S. needs a tax code that “welcomes all types of activity,” Carson says.

Clean energy may look like the technology of the future, but who knows? While the government is betting on solar panels, some Harvard dropout may be inventing an individual flying contraption powered by dehydrated cow manure that will make car travel go the way of the covered wagon.

And that’s the point. None of us knows. The U.S. has always been the most innovative country in the world. In the 1980s, it looked as if Japan was eating our lunch. Corporations sent hordes of employees overseas to learn Japanese management techniques.

It turned out that wasn’t necessary. Japan was simply better at producing what the U.S. invented. Now China has stepped into that role.

Last year, goods from the Pacific Rim accounted for 34 percent of total U.S. imports, unchanged from a decade ago, according to Carson.

“What has changed is the source,” he says. “China is a bigger assembler now. We import more from China, not from the region.”

Target Practice

Although most of the research and development for advanced technology is done in the U.S., “we transfer production of the goods we create overseas,” he says. “We should be producer and assembler, not just innovator.”

With labor costs, a clear advantage for China, becoming a smaller share of high-tech products, it makes sense for the U.S. to keep production at home -- if the U.S. offers business “a competitive tax structure,” Carson says.

The current 35 percent corporate tax rate is among the highest in the developed world.

The U.S. needs to have a dialogue on tax reform, an idea that has wide support among people of all political persuasions. Obama continues to talk reform, but he ignored the recommendations of his Commission on Fiscal Responsibility and Reform last year and now proposes modest cost savings from Medicare and nothing to stabilize Social Security.

Broad-based reform is not Obama’s style. He sees the size of the pie as finite -- and his job as slicer-in-chief.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

To contact the editor responsible for this column: Mary Duenwald mduenwald@bloomberg.net.