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.


The Budget Debate We Could Be Having

March 13, 2011

Arianna Huffington rightly calls it “the incredible shrinking budget debate.” She’s referring, of course, to the controversey about how much and where we’ll cut federal non-security discretionary spending.

The debate is shrinking — or more precisely, shrunk — for two reasons.

First, as I and many others have said before, it’s focused on a small fraction of the federal budget — and not the parts that are driving the deficit upward, e.g., health care costs, military spending. We could blow away the entire non-security discretionary part and barely make a dent.

Second, the current debate is focused almost entirely on the spending side of the ledger.

Republicans in Congress are dead set against tax increases of any sort. Indeed, on the House side, new rules pave the way for more tax cuts — and without offsets to keep the deficit from rising.

But what about the Democrats?

President Obama says he’ll push against a further extension of the Bush-era tax cuts for families earning more than $250,000 a year and the estate tax changes that benefit only the very wealthy.

But he’s still celebrating the extension of all the other tax cut extensions — an indication, I think, that he won’t back off his campaign promise not to increase taxes on the (generously defined) middle class.

Tax cuts for them represented a far larger portion of the costs of the December compromise than the tax benefits for the wealthy — $485 billion versus $139 billion, according to a Center on Budget and Policy Priorities analysis.

Presumably they’d again cost much more if extended past 2012, when all the cuts are due to expire. And, of course, there’s no way the President will get them extended without agreeing to keep the rest alive — unless the next elections produce a huge party shift in Congress.

So either the deficit soars or spending gets even more savagely cut.

On the positive side, the President would like the corporate tax code simplified. The Tax Foundation reports that the current plethora of deductions, incentives and the like will cost $102 billion this year.

But the President says he’d use the savings to lower the corporate tax rate, not to reduce the deficit. Perhaps because he wants a corporate buy-in and some Republicans at the table. As New York Times columnist Paul Krugman has observed, he has a history of “negotiating with himself” before the bargaining begins.

But that’s not the total story.

The President has gotten unfairly bashed for not incorporating the recommendations of his fiscal commission into his proposed Fiscal Year 2012 budget. But he’s apparently adopted a key part of the framework proposed by commission co-chairmen Erskine Bowles and Alan Simpson.

As CBPP’s top experts explain, the Bowles-Simpson plan skews toward deep program cuts. They’d represent more than two-thirds of savings through 2020, with about 21% coming from non-security discretionary spending.

And the two-to-one ratio is reportedly what we see in the President’s proposed Fiscal Year 2012 budget –or pretty close. Tax Policy Center Director Donald Marron says the revenue side seems somewhat more than one-third.

Why limit tax increases to one-third or so of a deficit reduction plan — especially when the baseline reflects a decade of tax cuts? So far as I know, it’s just an unexplained policy preference.

What if the tax breaks — corporate and individual — were viewed as less important than the needs of low-income people?

The Center for American Progress has an interesting table that pairs the total current costs of some of the safety net programs the House Republicans have targeted with the revenues lost due to some tax breaks that benefit “the wealthy,” including corporations.

It’s an eye-opener, though some of the pairings are, to my mind, a little dicey. We learn, for example, that:

  • Per-year lost revenues due to the recent tax cuts for very wealthy estates would more than pay for early childhood education programs.
  • Eliminating the loophole that allows hedge fund managers to pay taxes on what’s essentially salary income at capital gains rates would yield more than enough revenues to cover homelessness assistance grants.
  • The cost of extending “alcohol fuel,” e.g, ethanol, tax breaks is nearly double the current spending level for community health centers.
  • All the programs CAP identifies could be paid for by the first year of savings from not extending the Bush-era tax cuts for high-income filers.

Huffington concludes that the current budget debate is going to end with “lots of unnecessary suffering” because that’s what “those who control our political debate” have chosen.

I’d like to think she’s wrong, but it’s hard to envision a shift big enough and quick enough to yield a different outcome.