President Obama’s Tax Deform Agenda

By :: January 25th, 2012

For a while there, I thought President Obama was going to embrace tax reform in his State of the Union address.  Instead, following the lead of his predecessors, he offered a laundry list of new tax subsidies, bragged about some old ones, and said almost nothing about a top-to-bottom rewrite of the Tax Code.

Here’s just a partial list of the targeted tax breaks Obama promoted: Tax credits for clean energy and college tuition, as well as tax cuts for small business that create jobs, domestic manufacturers, high-tech manufacturers, and companies that close overseas plants and move production back to the U.S.

At the same time, he’d require individuals making more than $1 million to pay an effective income tax rate of at least 30 percent, in part by eliminating their ability to take many deductions. And, he’d use the tax code to punish companies that do business overseas, creating a new minimum levy that is supposed to assure that all multinationals pay some U.S. tax.

Obama’s embrace of the tax code as a vehicle to pick winners and losers sounded more than a little discordant in a speech whose theme was “everyone gets a fair shot and plays by the same set of rules.”  Not so much in a tax code where you get special rules for the government’s favored activities.

As Obama was tossing out his tax baubles, I kept wondering about those firms that somehow didn’t get on his gift list. I can just imagine lobbyists’ cell phones abuzz from furious clients wondering why they weren’t getting a tax break of their very own.

For instance, think about a start-up software company that has to compete with an established firm. Because new businesses rarely make money in their first years, extra tax deductions do them no good. By contrast, a more established competitor, especially if it can qualify for Obama’s high-tech tax break, would benefit—perhaps substantially.

The multinationals’ minimum tax would be entirely unworkable. Even if Congress passed the levy, which it won’t, those firms will find ways around it. Minimum taxes are Band-Aides for a flawed tax system. The solution is not to create a new penalty for firms that learn to manipulate the law, it is to fix the basic law in the first place.

If Obama wants to prevent companies from gaming the system, he could lower the corporate rate and eliminate tax preferences. He raised this in last year’s state of the union address but did nothing about it. That’s too bad. With a low enough domestic tax rate, companies would have less incentive to shuffle income overseas.

Or he could go in the opposite direction and eliminate deferral, the practice that allows multinationals to avoid U.S. tax until they bring earnings back to the U.S. But this minimum tax seems to be a half-measure that may play to his populist base but will achieve little.

I suppose it is inevitable that a president beginning his fourth year in office and facing a deeply divided Congress would go small-bore. After all, there will be no fundamental tax reform in the current environment and even proposing such a step would only open him to criticism from the usual suspects in housing, non-profits, finance and other industries that are very happy with the system as it is.

Still, it is a shame that, instead, Obama would make things worse.

 

14Comments

  1. The “There’s Got to be a Morning After SOTU” Daily Quinn « The Daily Quinn  ::  10:32 am on January 25th, 2012:

    […] Bad on taxes. […]

  2. Jake Lopata  ::  10:37 am on January 25th, 2012:

    Could not disagree with you more on “embracing tax reform”.

    I think everyone wants tax reform, but now is not the time.

    It would create an over whelming amount of uncertainty in the economy and add to the problems that hinder the fragile economic recovery.

    It is easy to blame the president, but I don’t think anyone would disagree that the bigger problem is this Congress.

  3. Vivian Darkbloom  ::  11:43 am on January 25th, 2012:

    Of course “everyone wants tax reform”—everyone always wants tax reform so long as those reforms benefit the individual who wants it.

    As far as “this is not the time”, that’s especially wrong. Tax reform is necessary now more than ever. The people who make economic decisions in this country know that “tax reform” is not only necessary, it is inevitable. They are just waiting to see what happens. Businesses and individuals are postponing investment because they know change is inevitable, but they are waiting to find out exactly what that change will be. Unfortunately, they will have to wait until after the election. Moving on tax reform now would have remove that uncertainty much sooner. These delays are bad for the economy, bad for reducing unemployment and bad for reducing the long-term deficit and debt. The only thing this delay is good for is the short-term political prospects of politicians. It is extremely disappointing that they are putting their own short-term personal interests above those of the country.

    Of course, Congress has to share blame for the current impasse; But, a lot of people disagree that “the bigger problem is Congress”. The President of the United States is our Chief Executive. The job of any chief executive is to lead—not follow. President Obama has failed to lead on tax reform because he is afraid of the political consequences of offering a real tax reform plan. He had nearly two years to get acheive tax reform when his party controlled both the House and the Senate. He did nothing. instead, he appointed a commission, the Bowles-Simpson commission, that came up with a very reasonable plan for tax reform and budgetary reform. Their recommendations were not only reasonable, but the report offered the basis for a bi-partisan compromise. President Obama simply ignored it. What a waste. As our chief executive, he should have embraced it and used at as the basis for a comprehensive proposal of his own. The State of the Union address was the best opportunity to make that proposal. His failure to do so was a complete abdication of responsiblity. So, yes, I blame him more. Does that make me nobody?

  4. Michael Bindner  ::  2:16 pm on January 25th, 2012:

    Most of these tax chestnuts were not thrown out there to actually be passed, but to score political points – although I suspect the payroll tax cut and corporate tax reform will make it through, possibly with additional taxes on dividends and capital gains as a pay-for – and this might actually happen fairly quickly.

  5. AMTbuff  ::  3:00 pm on January 25th, 2012:

    Businesses and individuals are postponing investment because they know change is inevitable, but they are waiting to find out exactly what that change will be.

    Exactly. Moreover, major change will CONTINUE to be inevitable until government spending on entitlements is credibly and permanently locked down to an affordable percentage of GDP. Investors will probably still be waiting for resolution of this huge uncertainty until the government bond market crashes.

    The best and perhaps only truly effective economic stimulus would be a grand bargain that both increases taxes and kicks the middle class out of government benefit programs. Voters will not approve this until the crash occurs, so it won’t happen. Too bad, because after that the options will be worse.

  6. Ginter Vurlicer  ::  3:17 pm on January 25th, 2012:

    Now is the time to “deform” the tax code to eliminate taxes on interest paid to savings accounts, especially long term retirement accounts, and dividends from American Companies’ stocks and bonds. Write in an exclusion to the top five percent of taxpayers so it does not become a loophole for the wealthy.

    Every savings account stimulates the economy by providing the basis for loans which have a ripple effect on the economy and generates plenty of taxes to help pay for government services and programs.

    We all want Americans to invest in American companies. Those companies are being taxed. Taxing dividends that pay less on an annual return on investment basis than the prevailing inflation rate makes no sense and discourages investment.

    It is absurd to tax interest income on any savings account that is losing value relative to inflation even when the interest is rolled back into the account rather than being sent as a distribution check. This just discourages Americans from saving.

    Deform the tax code so that all financial transactions are considered in light of the effects of inflation for taxation purposes. Don’t allow the IRS to tax phony financial profits where there are none, in fact.

  7. Howard Gleckman On Obama’s International Minimum Tax | TightWind  ::  6:33 pm on January 25th, 2012:

    […] Gleckman On Obama’s International Minimum Tax January 25th, 2012 The Tax Policy Center’s Howard Gleckman: The multinationals’ minimum tax would be entirely unworkable. Even if Congress passed the […]

  8. Ralph H  ::  2:53 pm on January 26th, 2012:

    If you believe that what the president says is correct and action should be taken, then imagine the tax code changes: (1)lower manufacturing tax rate (2) Higher tax rate (on all income) for Millionaires (3) Penalty on colleges who increase tuition over a specified inflation rate (4) Tax penalty on companies who move jobs offshore (5) Increased education loan forgiveness (6) Elimination of depletion allowances for oil companies (7) New tax on overseas earnings of US companies

    While its hard to argue with most, it would result in an even messier code. Fortunately, nothing will happen.

  9. Around The Dial – January 26, 2012 | South By North Strategies, Ltd.  ::  3:00 pm on January 26th, 2012:

    […] TaxVox worries about government by tax cut. […]

  10. Michael Bindner  ::  3:04 pm on January 26th, 2012:

    That’s like saying is aburd to tax consumption because goods lose value when used.

    Taxes are user fees for government. The question is, who to stick with the bill and why. I favor a lot more employer-based consumption taxes, with the tax funding services that employee-owned coopertives would fund in the absence of government (like eduction, health care and social services).

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