Goodbye tax reform. Thanks for stopping by.

Photographer: Nicholas Kamm/AFP/Getty Images

Obama's Disdain Kills Tax Reform

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.
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Many of the tax proposals in the White House plan released this week make good sense -- and you don't need to be a liberal to think so. President Barack Obama could easily have pitched them in a way that appealed to fiscal conservatives. He pitched them, instead, in a way that can only have been calculated to offend the opposition.

Since Republicans now control both chambers of Congress, you're forced to conclude that he either doesn't care whether his ideas get taken up or actually wants to see them fail.

The single best idea in Obama's plan is the proposal to bring unrealized capital gains more fully into the tax base. Under current law, vast fortunes comprising unrealized capital gains can escape income tax altogether. That's because heirs benefit from "step-up basis" relief.

Take a moment to understand just how absurd this idea is. Under any plausible definition, unrealized capital gains are "income." Since we tax income, the question is not whether unrealized capital gains should be taxed but when and how. No question of principle arises; it's a practical matter. The simplest way would be to treat the gains as realized on the death of the owner.

This isn't what happens. Suppose your father has stocks worth a billion dollars, acquired decades earlier for a fraction of their current value. If he sells them before he dies, the gains will face capital-gains tax, and you and his other heirs stand to inherit the net proceeds. If he doesn't sell them, the assets are passed down with the value stepped up to the current price. (The estate tax would then apply in either case.) Hey presto: For income-tax purposes, gains accumulated over the years simply disappear.

This indefensible provision is not just enormously unfair, it's also enormously inefficient -- because other kinds of income, such as wages, must be taxed more heavily to make up the difference. The step-up rule, according to the White House, shrinks the tax base by hundreds of billions of dollars each year. That forgone revenue could buy a lot of income-tax reduction for ordinary wage-earners. It could and should be used to make feasible a comprehensive, pro-growth simplification of the entire tax code.

At any rate, progressives and conservatives ought to be able to agree on closing the so-called angel of death loophole. Obama chose to make that hard if not impossible, by embedding the idea in a broader and stridently partisan tax-and-spend agenda.

To be sure, other parts of the president's tax plan also make sense -- doing more to help ordinary wage-earners save for retirement, for instance. But he hasn't proposed anything approaching a comprehensive tax reform; taken together, his proposals would further complicate an insanely complex tax code; and, above all, the packaging was gratuitously offensive to the new Congress. Its basic theme is about righting the wrongs of the capitalist system, raiding the undeserving rich, and financing a big new program of public investment.

Putting the merits of this worldview to one side, you could understand the president's approach if Democrats controlled Congress. Has it escaped Obama's attention that they don't? If anything is to be achieved during the next two years, it will have to command Republican agreement.

Obama's pitch on capital-gains tax deliberately taints a good idea, and diminishes the prospects for a broader reform package. Thanks for nothing, Mr. President.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Clive Crook at ccrook5@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net