Obama is tinkering with a tax system that needs fundamental reform
Bruce Bartlett
January 25, 2012
One of the few potential areas for bipartisan cooperation in Congress this year is tax reform. There is broad agreement on both the right and left that the US tax system is a mess. Since the last major tax overhaul in 1986, the tax code has become cluttered with far too many special tax breaks that cost a great deal of revenue and show little proof of effectiveness.
Meanwhile, American corporations are hobbled by one of the highest statutory tax rates and grave uncertainty about what tax regime will be in effect in 2013, as many tax provisions are scheduled to expire under current law at the end of this year. Unfortunately, Barack Obama effectively threw cold water on any tax reform effort in his State of the Union Address on Tuesday.
There is a consensus between Republicans and Democrats, at least among the tax experts, that the current situation is highly undesirable and in dire need of a permanent fix. They agree that the tax base needs to be broadened and tax rates reduced and that perpetually expiring provisions such as the research and development tax credit should either be made permanent or scrapped. Others, such as the alternative minimum tax, need be updated to better target those it was originally intended to cover and not those with modest incomes.
Since there are so many elements of the tax code that require rethinking and review, it would be best to do so in a comprehensive way, rather than in an ad hoc fashion. There is enough general agreement on what needs to be done that it is realistic to believe that something meaningful might be accomplished and enacted into law in the not too distant future.
But rather than proposing a cleaning-up of the tax code, Mr Obama is proposing several new tax preferences. He wants a special deduction available only to companies engaged in manufacturing to be doubled, but most tax specialists think this should just be abolished. He’s in favour of extending a tuition tax credit, which mostly gets capitalised into higher tuition fees and does little to improve access to higher education for middle class families. There’s also special tax relief for small businesses “that are raising wages and creating good jobs” that he wants to introduce even though no one knows how to target such incentives and past efforts have failed. Finally, he would like a new tax credit for “clean energy” and tax credits for companies hiring military veterans.
At the same time, Mr Obama proposes a variety of gimmicky new tax penalties, to punish companies that move jobs overseas for example. He wants to force every US-based multinational corporation to pay a minimum tax, and made individuals earning at least $1m per year to pay at least 30 per cent of their income in tax.
Whatever the merits of these specific tax proposals, they do not move towards tax reform. They move in the opposite direction, by cluttering up the tax code with still more special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess.
At a minimum, Mr Obama should have directed the Treasury Department to begin a study of tax reform as Ronald Reagan did in his 1984 State of the Union Address, which paved the way for the Tax Reform Act. Mr Obama’s decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret.
The writer a former senior economist at the White House, US Congress and Treasury. He is author of ‘The Benefit and the Burden: Tax Reform—Why We Need It and What It Will Take’
Meanwhile, American corporations are hobbled by one of the highest statutory tax rates and grave uncertainty about what tax regime will be in effect in 2013, as many tax provisions are scheduled to expire under current law at the end of this year. Unfortunately, Barack Obama effectively threw cold water on any tax reform effort in his State of the Union Address on Tuesday.
There is a consensus between Republicans and Democrats, at least among the tax experts, that the current situation is highly undesirable and in dire need of a permanent fix. They agree that the tax base needs to be broadened and tax rates reduced and that perpetually expiring provisions such as the research and development tax credit should either be made permanent or scrapped. Others, such as the alternative minimum tax, need be updated to better target those it was originally intended to cover and not those with modest incomes.
Since there are so many elements of the tax code that require rethinking and review, it would be best to do so in a comprehensive way, rather than in an ad hoc fashion. There is enough general agreement on what needs to be done that it is realistic to believe that something meaningful might be accomplished and enacted into law in the not too distant future.
But rather than proposing a cleaning-up of the tax code, Mr Obama is proposing several new tax preferences. He wants a special deduction available only to companies engaged in manufacturing to be doubled, but most tax specialists think this should just be abolished. He’s in favour of extending a tuition tax credit, which mostly gets capitalised into higher tuition fees and does little to improve access to higher education for middle class families. There’s also special tax relief for small businesses “that are raising wages and creating good jobs” that he wants to introduce even though no one knows how to target such incentives and past efforts have failed. Finally, he would like a new tax credit for “clean energy” and tax credits for companies hiring military veterans.
At the same time, Mr Obama proposes a variety of gimmicky new tax penalties, to punish companies that move jobs overseas for example. He wants to force every US-based multinational corporation to pay a minimum tax, and made individuals earning at least $1m per year to pay at least 30 per cent of their income in tax.
Whatever the merits of these specific tax proposals, they do not move towards tax reform. They move in the opposite direction, by cluttering up the tax code with still more special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess.
At a minimum, Mr Obama should have directed the Treasury Department to begin a study of tax reform as Ronald Reagan did in his 1984 State of the Union Address, which paved the way for the Tax Reform Act. Mr Obama’s decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret.
The writer a former senior economist at the White House, US Congress and Treasury. He is author of ‘The Benefit and the Burden: Tax Reform—Why We Need It and What It Will Take’
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