What Taxes Does Obama Want to Raise?

By :: April 14th, 2011

In yesterday’s budget speech, President Obama said that one leg of his fiscal policy stool is “tax reform to cut about $1 trillion in tax expenditures.” But what exactly is he talking about?

Obama mentioned only two tax increases in his speech—both golden goodies. He vowed that he would never extend the 2001 and 2003 tax cuts for high-income households beyond their (latest) expiration date of December, 2012. And he reprised a plan from his past budgets to cap the value of itemized deductions at 28 percent. The rest of the new revenue would come from unspecified changes in deductions, credits, and exclusions.

And then there is the tax reform piece of all this. The White House says some cuts in tax preferences would be used to reduce the deficit and some would finance lower tax rates.  How would the new revenues be divided?  At the moment, this appears to be a state secret.

As a result, I am struggling to make the president’s numbers add up. Part of the problem is Obama uses —shall we say—a flexible baseline.  To make matters even more confusing, yesterday’s speech sometimes targeted 10 year budget savings and sometimes 12 year savings. This obfuscation is no accident and makes it nearly impossible to compare Obama’s plan with the House Republican fiscal plan proposed by Budget Committee Chairman Paul Ryan (R-WI).

Here is what we do know: Obama figures his plan to cap itemized deductions would generate about $320 billion over 10 years.  Allowing the Bush-era tax cuts to expire for high-earners would generate another $700 billion. So he’s got his $1 trillion, right?

Not exactly. The President 2012 budget already assumes the 2001-2003 tax cuts for high-earners will expire after next year, so, using his own projections, Obama’s vow to let them die would generate no new revenue at all. Just to make matters more complicated, if you assume all the tax cuts really will expire as scheduled, extending those 2001 and 2003 tax cuts for all but the rich would increase the deficit by $2.4 trillion over 10 years.

Still with me? Now let’s look at Obama’s plan to cap the value of itemized deductions at 28 percent for those high-income taxpayers. Would it really generate another $320 billion? Remember, Obama also says he wants to scale back or even eliminate some tax preferences, many of which are deductions. But the more these deductions are cut back, the less money capping their value will produce.

That brings us to the mysterious $1 trillion in new revenues Obama promises by curbing those tax expenditures.  Will they be scaled back only for high-earners? Perhaps, although yesterday Obama dropped his usual mantra about never raising taxes on those making $250,000 or less.

Could Obama raise $700 billion over 10 (or 12) years only on the backs of those high-earners? The Tax Policy Center figures the top five percent of earners receive almost 60    more than 40 percent of the benefits of the $1 trillion in annual tax expenditures, or about $6$400 billion-a-year.  Thus, for Obama to grab $70 billion annually, he’d have to cut those tax benefits by nearly 15-  20 percent. The math works, although I’m not so sure about the politics, the economics, our even how such a scheme would work.      

When Ryan proposed his own tax plan a few weeks ago, I called it a black box.  He would cut the top individual and corporate tax rates to a very specific 25 percent, but he was utterly silent about which tax preferences he’d cut, or by how much. As a result, based on what we know Ryan’s budget ends up cutting taxes for high-income households by $2.9 trillion over 10 years.

In a funny way, Obama and Ryan are in the same boat. They have staked out largely ideological positions while leaving the hot-button details for another time. As a result, neither plan holds up very well when you look too closely. If their tactics lead to an eventual deal, these gaps will be long-forgotten. If not, both initiatives will end up on the growing scrap pile of fiscal plans that never did quite add up.

19Comments

  1. Michael Bindner  ::  5:00 pm on April 14th, 2011:

    Obama has a better boat as long he is good at playing chicken. If he absolutely refuses to sign any tax cut for the rich it will be because he thinks that economic recovery ensures his re-election (and that the lack thereof dooms him regardless of what he does on tax policy). His promise comes true automatically on January 1, 2013. Ryan needs to go through him. Donors will give Obama money to hang tough. GOP donors will, in the end, take any tax cut they can get. Once this becomes clear to all sides, a deal should be easy. Bush and the GOP never wanted to compromise on taxes. Obama does not have to.

  2. Michael Bindner  ::  5:02 pm on April 14th, 2011:

    This is a facts of life moment for Ryan. Someone needs to tell him he’s screwed.

  3. Sid F  ::  7:48 pm on April 14th, 2011:

    Obama’s promise not to renew the Bush tax cuts for the wealthy came due on January 1, 2011. What happened then.

    Bindner is correct in that if Obama says he will not sign an extension that includes extending tax cuts for the wealthy, then the Republicans will fold. Heck, they would have folded in December of last year had Obama stuck to his position. The problem is not that Obama cannot get a deal on taxes, it’s that he cannot negotiate effectively on taxes,(or anything else. There’s just something fundamentally wrong with his negotiating skills, mainly that he is more interested in being seen as flexible and willing to compromise than he is to be seen as tough, principled and determined. Unfortunately he has gained the former, and lost the latter.

  4. Michael Bindner  ::  8:39 pm on April 14th, 2011:

    I think he was covering for members of Congress who received donations from rich people who didn’t want their taxes raised just yet. Glenn Greenwald did an interesting article yesterday stating that Obama negotiates just find – he just wanted to give the Democrats the ability to cry all the way to the bank.

    Hopefully this time will be different.

  5. Sid F  ::  9:01 pm on April 14th, 2011:

    We will see how well the President negotiates well before 2013, in fact in a couple of months at the latest. He will have to negotiate an increase in the debt ceiling, and in that situation he has a strong hand. Also, he has already “explained” his vote against the debt ceiling while in the Senate in a very positive manner that should defuse that part of the issue.

    Still, he has signaled he will accept less than a clean bill (Obama so far is a great negotiater with himself) so the question is what social programs will be gutted in return for that vote. A good forecast is $50 to $100 billion in cuts to social programs to aid the poor, the uneducated, the sick, the elderly and any other group that depends in part on government to help with circumstances outside their control.

    If Obama stands firm and risks or even accepts a technical default, he deserves greater esteem. Just don’t bet the farm on that happening.

  6. Michael Bindner  ::  11:49 am on April 15th, 2011:

    I suspect the process is moving toward a “commission” solution with the Senate “Gang of Six” joined by six members of the House (4 GOP/2 Dem), the VP and a few other Presidential appointees, this time with adequate staff resources and a tasking to come up with legislative language for an up or down package by a date certain.

  7. Ralph H  ::  11:32 am on April 16th, 2011:

    I am puzzled by why there is no discussion of ending all of the Bush Tax Cuts. The focus on people making over $250 K is pretty lame given that they pay a disproportionate share of taxes. While signing my company’s checks I am appalled at how little Federal income tax is payed by many of my lower paid employees. If you want me to pay higher taxes, please hit everybody else. And by the way, since I am narrowly in the Obama target group, raising taxes on the base would increase my hit much more than raising the rate on the top rate.

  8. ApostasyUSA  ::  12:29 pm on April 16th, 2011:

    President Bush and his supporters argued that high-income tax cuts would benefit everybody because they would unleash investment that would spark widespread economic prosperity.

    There is no evidence of this. From 2000 to 2007, the United States lost one in five (3.5 million) middle-class jobs. A majority of the new jobs created in the United States under Bush pay extremely low wages at less than $18,000 a year, usually without benefits. This is with corporate profits at an all time high since 1960.

    The 2005 CBO data show that changes in law enacted since January 2001 increased the deficit by $539 billion in 2005. In the absence of such legislation, the nation would have a surplus that year. In 2010, when all the Bush tax cuts were finally phased in, a staggering 52.5 percent of the benefits went to the richest 5 percent of taxpayers.

    People who vote for Republicans are just too angry with tragedian Republicans talking points to understand that a government with no money can’t do any work for the people. Working class have been voting against their economic interests for decades. They continue to buy into the lies being sold to them by Republican politicians who can not point to one piece of Republican sponsored legislation that is pro-family, pro-consumer or pro-employee. Republicans consistently support and protect the interests of multinational big business and the rich, and yet poor and working class white stiffs remain loyal followers.

    An example of how Republicans fool people into voting for them is Fox News. Saudi Prince Alwaleed bin Talal owns a 7 percent stake in News Corp — the parent company of Fox News — making him the largest shareholder outside the family of News Corp CEO Rupert Murdoch. U.S. buys Saudi Arabia’s oil, and the bulk of his country’s gross domestic product (GDP) comes from oil. Fox News reliably broadcasts misinformation on clean energy, and aggressively fights efforts to move America away from being dependent on fossil fuels.

    I’m tired of Republicans. It was all a nice puppet show. Foolish elderly Republican voters actually think that Republicans are going to repeal the Heath Care Reforms and ban earmarks and bring “freedom” back.

    Would you hire a confessed animal hater to run a pet store? No? Then why would you elect politicians who freely admit to despising government?

    Republicans rally against regulation of industry, and then America sees how that turns out when BP spills a million barrels of oil in our seas. Republicans will rally against gay people, stripping them of civil rights, and then you find them tapping their toes in airport bathrooms looking for their gay lovers. Republicans will rally against non-existent communists but have no problem driving our economy to the ground with Karl Marx like spending of trillions of tax dollars that they borrowed from China for endless wars against enemies that did not attack us.

    After the last ten years of watching Republicans one word stands out as defining them perfectly; hypocrite. A vote for a Republican is literally a vote for the absence of leadership.

    Hands down, I’m voting for the Democrats for the next decade.

    “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”
    – Warren Buffet, the 2nd richest man in America

  9. Peri  ::  9:03 pm on April 16th, 2011:

    Both in the same boat? I’ll say! And up the creek without a paddle! No matter what tiny cuts they make in the deficit, the debt will keep growing until the rowboat called America sinks!

  10. Vivian Darkbloom  ::  3:31 am on April 17th, 2011:

    I also don’t really get how the proposal to restrict the benefit of itemized deductions to 28 percent raises revenue if we use current law as the baseline.

    Under current law (effective 2013) the elimination of the Pease phaseout rules will sunset. Under those rules, most itemized deductions are subject to an 80 percent phaseout at the margin. The effective benefit of itemized deductions at the margin is therefore 7.92 percent (20% x 39.6%). A 28 percent benefit sounds to me like a tax decrease. What am I missing?

  11. Vivian Darkbloom  ::  3:39 am on April 17th, 2011:

    The only way I can make sense of this is that the 28 percent benefit provision would be combined with significant changes to what is currently allowed as an itemized deduction in the first place. Obama mentioned that he proposes to eliminate a number of “tax expenditures”, but didn’t specify which ones. In order to make this work, those deductions would need to be eliminated for everyone, not just those earning more than $250,000. But, if this is the plan, it certainly doesn’t jive with the promise not to raise taxes on lower and middle income taxpayers (i.e. those earning less than $250,000 in his nomenclature). These various promises just don’t fit together consistently.

  12. Sid F  ::  9:12 pm on April 17th, 2011:

    The reason we do not understand either of these plans is because both are fraudulent, although the Ryan Plan is more fraudulent than the Obama Plan.

    The Ryan proposal is fraudulent is that none of the results can be justified, and as has been pointed out, his tax reform ideas are a black box which even he probably does not know the consequences. The plan is a total fiction.

    The Obama Plan is better in that there is the specific of not allowing an extension of the Bush tax cuts past January 1, 2013, which provides some specificity. The rest of it is about as the same as the Ryan proposal, broad generalities unsupported by fact or logic. (See Jon Stewart’s take).

    We are still waiting on a concrete proposal. Looks like a long wait, better bring a good book.

  13. Michael Bindner  ::  3:43 pm on April 18th, 2011:

    Obama is currently counting on some kind of compromise. If he were to let all the 2010 tax laws expire, there would be no need to pass any kind of plan.

    His main problem is that he thinks the GOP will actually negotiate. With the spectre of a tea party challenger for any Republican who does, I suspect that the Clinton tax law will come back in full force, with additional payroll or consumption taxes to fund health care as an inevitability, but not an immediate one.

  14. Michael Bindner  ::  3:45 pm on April 18th, 2011:

    I suspect you mean you are waiting for a concrete proposal from elected officials. There are proposals out there that are quite concrete – mine is one of them. It seems one must have influence to be scored.

  15. Sid F  ::  4:43 pm on April 18th, 2011:

    Yes proposal are out there, including ones sponsored by individuals who have posted on the Forum that are quite specific. The problem is that those sponsors (and myself also)have no ability to even introduce the proposal into the legislative process. And many of the proposals are fundementally sound but politically infeasible.

    Until legislation is proposed and introduced that has a serious chance of becoming law our comments and proposals are like cheers at the football game. They may urge the players on, but in the end the folks on the field must score the touchdowns.

  16. Taxes, Republicans and Compromise – NYTimes.com  ::  8:15 am on April 21st, 2011:

    […] the details of how Ryan’s tax plan gets to revenue neutrality are fuzzy, but no fuzzier than the details of the president’s counterproposal.) And then I also see that two very conservative Republican Senators voted for the Simpson-Bowles […]

  17. The White House, the Democrats and the Deficit – NYTimes.com  ::  12:11 pm on April 27th, 2011:

    […] that actually did include some deficit reduction measures. But this pseudo-budget had many of the same black-box elements that critics have identified in the Ryan plan — and even if you accepted its assumptions, it […]

  18. Maryellen  ::  4:58 am on December 16th, 2011:

    I’m not easily impressed but you’ve done it with that poitsng.

  19. lwommw  ::  7:51 am on December 18th, 2011:

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