Yesterday during an interview with CBS’s Scott Pelley, President Obama explained that the tax increases he’s already won aren’t the end of his revenue demands:
There is no doubt we need additional revenue, coupled with smart spending reductions in order to bring down our deficit. And we can do it in a gradual way so it doesn’t have a huge impact. And as I said, when you look at these deductions that certain folks are able to take advantage of, the average person can’t take advantage of them. The average person doesn’t have access to Cayman Island accounts, the average person doesn’t have access to carried interest income, where they end up paying a much lower rate on millions of dollars that they earn.
He also asked, “Can we close loopholes and deductions that folks who are well connected and have a lot of accountants and lawyers can take advantage of, so they end up paying lower rates than a bus driver or a cop. Can we close some of those loopholes?”
First, it’s notable the president couches his discussion of further tax increases in class terms — while he likes to emphasize that more revenues are key to closing our fiscal gap, he seems to place just as much importance on closing the loopholes because the wealthy don’t deserve them as he does the fact that it’ll reduce the deficit. Moreover, it’s important to note that the idea that “bus drivers and cops” are likely to pay a lower tax rate than “well connected” wealth “folks” is largely a myth, though a popular one among liberals. The U.S. federal tax code is pretty progressive and, while there are people earning $5 million a year paying a lower tax rate than those earning $50,000 per year, they’re quite uncommon. The average tax rate paid by the 1 percent is much much higher than that paid by the top quintile, which is higher than the second-to-top quintile, etc. (see this chart from the Tax Policy Center to see that rates clearly and substantially increase by each quintile).
It might disappoint him to discover that you actually could put something of a dent in the deficit by closing loopholes, and a lot of those loopholes do disproportionately benefit the wealthy (since they pay more in taxes at higher rates), but the loopholes you’d limit to close the deficit are not the abusive, nonsensical exemptions, concocted by tax lawyers, that the president likes to talk about — that is, he might want to raise substantially more revenues by reducing or eliminating tax expenditures, and he might want to close abusive special-interest loopholes, but those are not the same task. Look, for instance, at the largest tax expenditures in the federal tax code:
Which, exactly, would the president like to eliminate? There are obviously some exclusions here that disproportionately or mostly benefit the rich, in part because they’re useful for large corporations, but they’re not really easily eliminated: A preferential rate for capital gains, deferral of taxation on foreign income, and accelerated depreciation all could be seen as giveaways to corporations and the rich, but they’re also just standard features of a modern tax system (in fact, the U.S. tax system is much more greedy when it comes to income earned abroad than most other countries, the president’s stimulus bills have actually made the tax code’s accelerated depreciation rules more generous, etc.).
The truly substantial tax expenditures that could reasonably be done away with or reduced in a way that takes a whack at the deficit include the mortgage-interest deduction, the state-and-local-taxes deduction, and the charitable deduction — which do benefit the wealthy more than they benefit the middle class, but also are hardly the sole preserve of people with fancy lawyers and accountants. These measures may or may not be good tax policy or good public policy, period, but they’re also not without some good justification; obviously, many people would like to encourage philanthropy and home ownership. If you want to raise substantial amounts of revenue from closing loopholes, it’ll cut into exemptions such as these.
Now, there are features of the tax code that do seem a lot less sensible to most Americans, in addition to having more than a whiff of the 1 percent about them, so that’s what the president usually talks about: Essentially, special depreciation for corporate jets, the carried-interest exemption, and tax preferences for oil-and-gas companies. Somewhat pathetically, these three exemptions make up three of the five specific loopholes the president has said he’d like to close when doing corporate tax reform (they’re included as revenue-raisers in the president’s 2013 budget, too). The American people might approve of closing these loopholes, and done right, maybe we should — but how much of that needed “additional revenue” will that get us? In 2014, according to the president’s budget, eliminating the tax breaks for corporate jets gets you $174 million; carried interest, $1.9 billion; and Big Oil $3.9 billion. Chump change, basically — though apparently of great importance to the White House, which once derided the vaguely center-right proposal of a capping individuals’ itemized deductions because it might raise a paltry $650 billion over ten years.
Long story short, the president isn’t being quite honest in arguing for that we need big chunk of revenue, and suggesting we should get it via eliminating loopholes for the rich and famous. If he’s serious about raising another substantial amount of revenue (at least, say, several hundred billion dollars over the ten-year budget window) without raising rates, there are two common, realistic possibilities: limit the value of itemized deductions for high-income earners, or institute a cap on them. Limiting their value would mean allowing taxpayers in the top two or three tax brackets to deduct only 28 percent of the value of their deductions, instead of whatever their top tax rate is (35, 36, or 39.6 percent) — this basic proposal has been set forth in the president’s last few budgets. This would ab definitio only draw revenue from taxpayers making over a certain income threshold (see who would pay here), and the White House says its proposal would raise $584 billion over ten years. Interestingly, that number, or whatever revenue projection we’d end up with based on the value of deductions, is actually higher than it would have been had the tax rates not permanently gone up on the wealthiest Americans this year, because the value of an extra dollar in deductions for someone making over $400,000 now is 39.6 cents, versus the 35 cents it was last year — the president’s proposal will chop that down to 28 cents, which his budget amusingly calls “the deduction rate . . . at the end of the Reagan Administration” (because, you know, the top tax rate was lower then, too).
Lastly, I don’t think I even need to point out that the president’s proposed budgets, like the fiscal-cliff deal, maintain and expand a wide range of corporate tax breaks for very specific, and very well-connected, special interests — but ones that either Republicans and Democrats in Congress have deemed politically precious or that the president was convinced were a good idea by reading Tom Friedman’s column. Veronique de Rugy has pointed out in this space the range of corporate tax subsidies embedded in our tax code and extended by the fiscal-cliff deal, the 2013 revenue losses from which actually add up to more than the income-tax increases the president won. Similarly, I wouldn’t be surprised if the president’s budget proposes to add more new corporate loopholes than it closes.