Taxes in Obama’s Budget: Few Specifics but Some Big Principles

By :: February 13th, 2012

When it comes to taxes, President Obama has proposed what might best be called a conceptual budget—a powerful call for tax reform that is long on principles but, at least when it comes to individual levies, woefully short on specifics.

This is understandable with what is effectively a reelection manifesto. In high campaign season, specifics get a candidate in nothing but trouble. Still, this framework is at once disappointing and illuminating.

It sets up a powerful contrast with whomever the GOP nominates to replace Obama: Should tax reform be used to raise revenues, an explicit goal of this budget, or should it be a vehicle to cut taxes and increase the deficit—the specific aim of every remaining GOP presidential contender?

Yet, Obama’s fiscal plan is disappointing because it is so vague. There is simply no chance Congress will make the tough votes necessary to enact any serious tax reform without a president who is prepared to take the heat for specific, deeply controversial cuts in popular middle-class tax preferences.

But Obama’s budget contains little more than gauzy promises for a “simpler, fairer and more progressive” tax system or, elsewhere, a “simpler, fairer and more efficient’ system. Know anybody against those principles?

There are plenty of proposals to end corporate tax breaks, but when it comes to individual taxes, the Obama budget is the Oakland of tax policy. To borrow from Gertrude Stein, there is no there there.

Yes, he’s proposed taxing dividends at ordinary income rates and found a new way to tax investment firm partners so they could no longer treat their compensation as capital gains. Talking to you, Mitt Romney.  But otherwise, the White House has done little more than rehash some Golden Goodies—allowing the 2001/2003/2010 tax cuts to expire for those making more than $200,000, and capping the economic value of itemized deductions at 28 percent.

This adds up to little more than raising taxes on “the fella behind the tree” and ignores those deductions, exclusions, and credits that benefit middle-income households, pervert the tax code, and keep tax rates high.

Even the much-ballyhooed “Buffett tax” is an empty vessel. After making a major fuss in his State of the Union address about requiring those making a million dollars a year to pay their “fair share” in income taxes, President Obama has proposed…nothing.

As a result, the only plan on the table is one proposed by Senator Sheldon Whitehouse (D-RI). With all respect to the senator, a plan by Whitehouse is not the same as a bill from the White House.

Obama’s unwillingness to get down and dirty with legislative specifics seems ingrained in his DNA. He did the same thing with the health reform law, which Congress turned into a mess. And he did it with financial reregulation which, despite whining from Wall Street and the banks, has done little to prevent a rerun of the financial abuses of the past decade.

Still, pay attention to Obama’s principles for tax reform. They set the stage for what could become an epic battle, if Obama gets reelected and is serious about pursuing tax reform (I wouldn’t bet on either at the moment).

Obama laid out five principles. Three--lowering rates, increasing job creation and growth, and cutting “inefficient and unfair tax breaks” --are the mom and apple pie of tax reform.  It’s just that nobody can agree on what inefficient and unfair means.

But numbers 3 and 5 will generate a political donnybrook. Number 5 is the Buffett rule. Number 3 is to use tax reform to cut the deficit by $1.5 trillion over the next 10 years.

The last one will do the most to separate Obama from his GOP challenger. Rather than shying from the charge that he’s a tax-hiking Democrat,  Obama explicitly vows to use reform to raise revenues—but says he’d get the money almost entirely from rich people. This promise alone will make for an interesting campaign.

13Comments

  1. Vivian Darkbloom  ::  4:26 pm on February 13th, 2012:

    “Number 3 is to use tax reform to cut the deficit by $1.5 trillion over the next 10 years.”

    Sharpen your pencil, Howard and please keep a closer eye on those baselines. The *1.5 trillion “deficit reduction from tax reform” presumably refers solely to the budget proposal to increase taxes on the top 2 percent over the next 10 years. Consistent with this, and by any reasonable interpretation of “tax reform” one would need to include any legislative action on taxes needed to implement this budget proposal. Let’s not just pick the budget reducing portions and ignore the rest.

    Per Schedule S-3 of Obama’s budget summary, the “tax reform” numbers look more like this:

    –High end tax increases -$1.433 trillion
    –Extend temporary tax reductions thru 2013 352 billion
    Net – $1. 281 trillion

    More importantly, what is not mentioned in the budget is the cost of extending the tax cuts for everyone else. Does it make any sense to take deficit reduction credit for not extending part of the historical tax cuts (which requires no legislative action) but at the same time refusing to count the cost of legislation that extends them for everyone else? The latter action (and action is needed) increases the deficit by about $2 trillion. Thus, the net deficit *increase* from this “tax reform” is more than $700 billion and probably much more.

    http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/tables.pdf

    And, of course, the behavioral response to these proposals means that the high-end changes will not bring in nearly as much as claimed. Will companies continue to pay dividends and will these investors continue to invest in stocks that do pay dividends?

    On the spending side, the obfuscation is even more alarming. The deficit reduction claim calculates back to January 2011. The FY 2013 budget starts October 1, 2012.

    How can you take this seriously?

  2. AMTbuff  ::  8:52 pm on February 13th, 2012:

    There is simply no chance Congress will make the tough votes necessary to enact any serious tax reform without a president who is prepared to take the heat for specific, deeply controversial cuts in popular middle-class tax preferences.

    Howard, that’s correct on the tax side but the benefit side is much more important. I don’t take any budget proposal seriously unless it slashes promised benefits to the middle class. The foundation of our economic recovery is default on government’s promises to the non-poor.

    Family members can take care of each other across generations at vastly lower cost. Sending tax money to Washington and getting part of it back in cash, part in all-you-can-eat medical services, and part in bureaucrats’ salaries is simply too wasteful an approach to employ for the whole population.

    Parents of the baby boomers have enjoyed a holiday from the economic law of gravity, but the free ride couldn’t last. The sooner we admit that it’s over, the sooner our economy will start growing again.

    Politicians fear cutting promised benefits. They should instead recall that Margaret Thatcher did something similarly unpopular. When the British economy took off shortly thereafter, she got the credit for it. The same will happen here for any President brave enough to call for a new era of family self-sufficiency. It might not be preferable in a world where money grows on trees, but in this world it’s preferable to an implosion of benefits for the poor and middle class alike.

    True concern for the poor requires sustainable spending. That requires exclusion of the middle class from government assistance. For the benefit of the poor, middle class families need to step up and take care of their own.

  3. Michael Bindner  ::  9:03 pm on February 13th, 2012:

    Essentially, Obama is putting the vague proposals of Simpson Bowles into an equally vague budget. It is a throwaway document because the 2013 allocations have already been made in the 2011 Budget Act, although it may have some legs in dealing with the expiration of the Bush tax cuts during the lame duck session. Of course, if Obama loses, his best bet is just to call the GOP bluff and let them expire.

  4. Michael Bindner  ::  9:10 pm on February 13th, 2012:

    Expecting families to pick up the slack ignores why we have social insurance, which is to even out family circumstances in terms of wealth, parental mortality and family size. Poor people with small families will simply watch their loved ones die without treatment. The wealthy will get treatment. Large families or families with dead parents will get an undeserved benefits, while small families or families with living parents will have undeserved costs. The only alternative is to force employers to cover the senior dependents of their employees. They would rather pay higher payroll taxes.

  5. Michael Bindner  ::  9:15 pm on February 13th, 2012:

    The behavioral responses are scored – and yes – companies will pay dividends if that is what expected of them. This proposal is essentially an inventation to tax reform, even though the Treasury Department has not done the necessary groundwork – mainly because it is seen as a waste of time given GOP opposition to all tax increases. The approach of December 31 without any deal will put pressure on the GOP and the ATR to geek in order to avoid automatic increases. Especially if they figure out that a lame duck Obama has no incentive to not extend the Bush tax cuts.

  6. TaxVox » Blog Archive » Taxes in Obama's Budget: Few Specifics … « Double Taxes  ::  10:35 pm on February 13th, 2012:

    […] post: TaxVox » Blog Archive » Taxes in Obama's Budget: Few Specifics … Comments […]

  7. Vivian Darkbloom  ::  3:33 am on February 14th, 2012:

    “The behavioral responses are scored …”

    Here’s what the Budget Report has to say on that:

    “The preferential rate on qualified dividends is identified as a tax expenditure.

    Interpreting Tax Expenditure Estimates

    “The estimates shown for individual tax expenditures in Tables 17–1, 17–2, and 17–3 do not necessarily equal the increase in Federal revenues (or the change in the budget balance) that would result from repealing these special provisions, for the following reasons.

    First, eliminating a tax expenditure may have incen- tive effects that alter economic behavior. These incentives can affect the resulting magnitudes of the activity or of other tax provisions or Government programs. For exam- ple, if capital gains were taxed at ordinary rates, capital gain realizations would be expected to decline, resulting in lower tax receipts. Such behavioral effects are not reflected in the estimates.”

    http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/receipts.pdf (pp 247-248 of “Analytical Perspectives”)

    The OMB estimated the total revenue increase from the dividend provision would be $206 billion over 10 years. This sure does not sound to me as though they have taken behavioral responses into account and deviated from the above approach.

    Michael, here’s your chance to prove me wrong–where is your authority?

    “This proposal is essentially an inventation to tax reform…”

    Inventation. I do agree with that.

  8. SteveinCH  ::  10:19 am on February 14th, 2012:

    And means testing benefits as a way to manage down the costs?

  9. AMTbuff  ::  3:53 pm on February 15th, 2012:

    I don’t argue that family taking care of family is perfect. Only that it is much less wasteful that a comprehensive government program and that the latter is unaffordable regardless of its merits.

    Progressives have difficulty seeing any government program as unaffordable. They want to spend whatever it takes: Just tax more and borrow more. When the borrowing window closes, progressives will have an unpleasant encounter with fiscal reality. And with the fact that they have crashed the entire benefits system, doing great damage to the poor. All because they wanted to achieve a mathematical impossibility: putting the middle class into the safety net and keeping them there.

  10. Kyla Pettitt  ::  5:08 pm on March 14th, 2012:

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  11. Social Insurance  ::  10:12 am on April 14th, 2012:

    The government demands taxes in every business or depending on the statue of one person for the purpose of maintenance. Government programs like social insurance is the best example because of the aid it provides which is why I totally agree with this article.

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