Given that Bruce Bartlett is one of the most scathing critics of Republican tax policy, his remarks concerning President Obama’s tax proposals struck me as worthy of note:
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.
Though I agree that the shift away from tax reform Bartlett describes represents a substantive error, it’s not clear that it also represents a political error. Upper-middle-income voters, particularly those employed directly or indirectly by the public sector, are very receptive to efforts to redress rising inequality. (The most effective antidote for rising inequality, as Megan McArdle has observed, is the destruction of wealth that tends to accompany a prolonged economic crisis, but this generally goes unremarked upon.) This is a crucial constituency for the president, and he aims to secure it with populist appeals.