President Obama will finally release a budget this week. Obama consistently ignores the statutory timeline for releasing his budget, and this year is the latest he has ever put forward a fiscal proposal. On all things administrative, the president is frequently dilatory. But those waiting with bated breath for Obama’s proposals will be disappointed -- the budget will be more of the same and has little chance of actually being passed or even taken up by Congress.
Obama’s obsession with recycling old ideas that even Democratic Congresses have refused to consider is well documented. But rather than rehash all of the old ideas likely to be in the president’s proposal (eliminating section 199 deductions for oil and gas companies, a cap on deductions, and various small international base erosion provisions) or even the few new items (a $3 million cap on individual retirement accounts and an increase in the federal tobacco tax), let’s talk about what should be in Obama’s budget.
1. Obama needs to articulate a clear vision on international tax reform. This is the most important item that could be in the fiscal budget proposal because it is the one area of tax policy on which strands of bipartisan consensus exist. But the president must take the lead. Obama needs to decide whether he and congressional Democrats will accept a corporate rate cut in 2013 or 2014. And if so, will they make a serious push to get as close to 25 percent as possible? Obama’s plan should also spell out how to pay for this rate cut, and he can’t send mixed signals about base erosion versus competitiveness. The whole point of cutting corporate taxes is to improve the business climate for multinational corporations and to attract foreign investment. If the budget also includes tax proposals designed to penalize companies for having foreign profits or locating overseas, what’s the point? At the same time, Obama needs to emulate House Ways and Means Chair Dave Camp, R-Mich., and include real antiabuse rules in any corporate tax reform plan. Any corporate tax plan must address the difference between the statutory and effective tax rates paid by multinationals, particularly those that have aggressively shifted intangible income offshore (Google, Apple, and major pharmaceutical companies).
2. The budget must include serious entitlement reform. If Obama wants to actually make a grand bargain this year, he must spell out the Medicare and Social Security cuts that the Democratic Party will accept. The Huffington Post and other left-of-center commentators have already started slamming the president for cuts that might be in the budget, but there is no chance of working with Republicans, in either the Senate or the House, if entitlement reform is not on the table. Yes, Obama won the 2012 election. But voters also returned to office a very right-of-center House, and Obama needs to realize that the GOP, despite its weakness, won’t accept a deficit reduction plan that doesn’t include a plan to scale back Medicare spending or address the long-term future of Social Security.
3. The proposal should address how to replace the sequester cuts in a realistic way. Republicans bargained hard for the spending cuts in the sequester compromise. They might have hoped that those cuts would ultimately be shifted away from defense and some discretionary programs to entitlement cutbacks, but they won’t trade spending cuts in the sequester for tax increases on the rich. Obama needs to let that idea go. If he wants to reduce the impact of the sequester, he should include alternative spending cuts that affect less critical government programs. Both parties need to accept that the defense budget must be reduced, and if the president takes the lead on the issue, there is a greater chance of actually achieving a compromise.
4. Any new revenue in the budget must be accompanied by rate cuts. In their heart of hearts, Republican lawmakers probably know they won’t get lower rates without some new taxes. The revenue question isn’t settled – not by a long shot. But Obama has to accept that Congress will never pass a budget or tax reform plan with tax increases that doesn’t include some cut in marginal rates. If Obama wants to raise taxes on the wealthy, either through a deduction cap (which Republicans have supported in the past) or some other means, he will have to pair that plan with reductions in marginal rates. The GOP and conservative Democrats (yes, there are a few of them left, and many are running for reelection in 2014) will not support individual base broadening without some rate cuts. Again, if the president took the lead on the issue, he would have a better chance of framing the discussion and then achieving compromise.
5. The budget should increase IRS funding and include tax simplification. The latter is a pipe dream, but this is a fantasy exercise after all. Obama has made the code much more complex during his four years in office. Presidents Bush and Clinton didn’t help matters (in fact, Clinton started the trend of putting complicated, targeted tax provisions back in the code after the 1986 act stripped many of them out). Now is the time for the president to start reversing that trend. Propose a unified education credit. Keep pushing for a better research credit. Join Camp in trying to simplify passthrough rules. And Obama needs to go back to his 2009 and 2010 roots, when he fought for increased funding for the IRS. There is no reason for the budget of the government’s primary revenue collection agency to be treated the same as any other discretionary spending. Yes, the IRS needs to understand that the federal government is in austerity mode, and it shouldn’t be producing parody videos or wasting money on non-merit bonuses, but Congress and the White House also must realize that increased spending on enforcement will help raise revenue and will help implement any tax reform plan that does develop.