Giving The President His Due On Tax Reform

March 19, 2011

I realize that I haven’t given President Obama full credit for the tax reforms he’s proposing as part of his Fiscal Year 2012 budget.

First, there seems to be a fairly wide consensus that the basic corporate tax rate is too high. At 35%, it’s higher than the rates in every other country with a highly-developed economy.

Which isn’t to say that U.S. corporations pay more in taxes. In 2009, General Electric owed nothing to the U.S. government. In fact, it managed to report a $1.1 billion tax benefit, i.e., negative domestic earnings, which it can use to offset future tax liabilities.

If I understand correctly, the argument economists make is that the high nominal tax rate, combined with the mass of deductions, credits and the like distorts economic decision-making and may create incentives to locate job-creating production overseas.

So the President’s plan seems to make sense. And the revenues potentially lost by reducing the statutory rate have to — or rather, should be — paid for somehow.

I think I may have been misled by the term “revenue neutral.” I understand now that it’s a shorthand for a corporate tax reform plan that doesn’t increase the deficit. To my knowledge, the President and his people haven’t indicated whether they will seek a plan that raises more revenues from the corporate sector.

Second, the President isn’t focused only on corporate tax reform. He again proposes some changes for individual taxpayers that would bring in more revenues.

As I’ve already said, he’s again going to “push against” a further extension of the Bush-era tax brackets for families earning more than $250,000 a year and again going to try to restore the estate tax to what it was during the last year before it expired.

He’s also recycling some related proposals, e.g., raising the tax rate on capital gains from 15% to 20% — again, only for high-income filers.

And once again, he proposes closing the loophole that allows hedge fund and private equity fund managers to pay the capital gains rate, rather than a regular income tax rate on a substantial portion of their compensation.

Beyond this, the most significant — and undoubtedly controversial — change in the individual income tax code would cap the value of itemized deductions for high-income filers at 28%. Probably the largest impact would be on the subsidy we provide, through the tax code, for home ownership.

The Tax Policy Center puts the total cost of this year’s subsidy for home mortgage interest alone at $131 billion. Savings would be considerably less, since the deduction would be capped only for families with incomes over $250,000.

The Economic Policy Institute reports that all revenues raised by the cap would total $321.3 billion over 10 years.

The President proposed the same deductions cap in 2009 and again in 2010. The first time, the extra revenues were supposed to help pay for the then-pending health care reform plan.

This time, revenues gained would be used to offset the costs of a three-year “patch” for the Alternative Minimum Tax. Congress regularly passes a short-term “patch” to exempt middle income filers, who were never supposed to be subject to the AMT.

But it doesn’t always provide for an offset. So a three-year, paid-for fix seems a fiscally responsible proposal.

None of this, however, affects the point I made about the balance between spending cuts and revenue raisers in the proposed budget.

The roughly one-third revenue raisers/two-thirds spending cuts formula seems to me arbitrary and counter to our national interests.

Top of my list are growing the economy (without destroying the planet), reducing egregious income inequality, ensuring public health and safety and providing for the needs of low-income and other vulnerable people.

Fiscal commission members Alice Rivlin and Pete Dominici chaired another group that developed a plan distinctively different from the plan of the fiscal commission co-chairs.

This one would produce a 50-50 split. Some parts of it are problematic — most notably, the proposals for reducing federal health care spending.

But it shows there’s no magic in the framework the President has apparently adopted. There are a lot of ways to skin this cat.


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