Tax Analysts Blog

Will Obama’s Call for Tax Reform Ring Hollow?

Posted on Feb 11, 2013
President Obama is going to call for tax reform in his State of the Union address this week. According to sources, the president will use tax reform as a way to lower the deficit, promote job creation, and address the growing income disparity. The latter will be couched in terms of how to increase wages. Obama has mentioned tax reform in a major address before -- in fact, several times. But if he actually follows through on it, it will be a first.

What does tax reform mean to Obama? That’s a hard question. On the international side, it means raising money by tightening the rules in the worldwide tax system. The president has in the past proposed limits on foreign tax credits, check-the-box repeal (quickly dropped), and limits on foreign expense deductions. He has also railed repeatedly against tax rules that favor the movement of jobs offshore, but he hasn’t really backed harsh plans like those favored by Sen. Carl Levin, D-Mich. In other words, Obama would like to move in the opposite direction from what the rest of the world and many business leaders and Republicans in the United States prefer. Instead of reforms that would improve competitiveness (which really means lowering taxes), the president would like to raise taxes on multinationals. His barebones corporate reform plan would have lowered the rate to 28 percent, but it included enough pay-fors to make the cut much less appealing, at least to those doing business overseas.

Obama’s domestic agenda is much less consistent and seems to have been largely accomplished by ATRA, the law that “solved” the fiscal cliff dilemma. The portion of the Bush tax cuts that will be allowed to expire already has expired. It is highly unlikely that the president will call for higher rates on anyone in his State of the Union address. Democrats managed to save the estate tax from extinction, but it has been sharply scaled back from its Clinton-era form. The Making Work Pay credit and the payroll tax cut are both gone, and it would be surprising if Obama called for permanent versions of either in a tax reform plan.

A balance between revenue and spending cuts is the only consistent message that Obama has put forward about tax reform. And that should concern those hoping for the president to lead the way on fixing the nation’s tax code. Obama does not distinguish between reducing the deficit and tax reform; in fact, he frequently implies that the latter leads to the former. For Obama, domestic tax reform seems to mean repealing oil and gas tax preferences, capping deductions at 28 percent, ending tax preferences for corporate jets, and other relatively small-change proposals to raise revenue. Those are revenue raisers, not a reform proposal. None of it would simplify the code, and, as a plan, it doesn’t really provide Congress with a grand vision, like Reagan had, for tax reform.

Both sides use tax reform as a euphemism for other proposals. For Republicans, tax reform is a way to cut taxes and enact supply-side economic principles. So they are unwilling to acknowledge that more revenue needs to be raised from the wealthy or multinationals with effective tax rates in the single digits, even if it would allow lower rates or a smaller burden on the middle class. For Democrats, tax reform is simply a way to avoid saying they want higher taxes to fund a level of government they are comfortable with. Obama, as a Democrat, wants to raise more revenue to avoid harsher spending cuts. He wants to use rising income inequality and stagnant wages as a way to build public support for increasing taxes on upper-income taxpayers or faceless corporations. He doesn’t really see the tax code as a hindrance to economic growth, and he has little invested in pushing for a sea change in the nation’s tax laws.

Obama wants to be remembered as leading the country out of the Great Recession and solving the subsequent debt and deficit problems (which he and his party largely created through their 2009 stimulus package). He might say the words “tax reform” in his State of the Union address, but listeners shouldn’t be fooled. He really means deficit reduction through higher taxes and spending tweaks. This is 1993, not 1986.

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