State of the Union and Tax Reform

White House release of 2013 State of the Union Address, 2/12/13

Last night in the State of the Union Address, President Obama stated that tax reform and closing "tax loopholes" is needed, apparently for improving the tax system, reducing the deficit, and funding other needs.  Specifically, he stated:

"To hit the rest of our deficit reduction target, we should do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and the well-connected.  After all, why would we choose to make deeper cuts to education and Medicare just to protect special interest tax breaks?  How is that fair?  Why is it that deficit reduction is a big emergency justifying making cuts in Social Security benefits but not closing some loopholes?  How does that promote growth? 

 

Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit.  We can get this done.  The American people deserve a tax code that helps small businesses spend less time filling out complicated forms, and more time expanding and hiring -- a tax code that ensures billionaires with high-powered accountants can’t work the system and pay a lower rate than their hardworking secretaries; a tax code that lowers incentives to move jobs overseas, and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.  That’s what tax reform can deliver.  That’s what we can do together.

 

I realize that tax reform and entitlement reform will not be easy.  The politics will be hard for both sides.  None of us will get 100 percent of what we want.  But the alternative will cost us jobs, hurt our economy, visit hardship on millions of hardworking Americans.  So let’s set party interests aside and work to pass a budget that replaces reckless cuts with smart savings and wise investments in our future.  And let’s do it without the brinksmanship that stresses consumers and scares off investors.  The greatest nation on Earth cannot keep conducting its business by drifting from one manufactured crisis to the next.  (Applause.)  We can't do it.  

 

Let’s agree right here, right now to keep the people’s government open, and pay our bills on time, and always uphold the full faith and credit of the United States of America.  (Applause.)  The American people have worked too hard, for too long, rebuilding from one crisis to see their elected officials cause another."

A few observations:

• What are "tax loopholes?" This should really just refer to a rule written poorly so it allows deductions or other special treatment to taxpayers or transactions it was not intended to cover. In the context of getting rid of special deductions, exclusions and credits, "loophole" tends to be used to help send a message that the rule is problematic or even evil.
• Why the focus on getting rid of "tax loopholes" for the "well-off and the well-connected" rather than for all taxpayers?  If something is a "loophole" it should go away for all taxpayers.
• Reference to helping small business and not encouraging companies to move jobs offshore sounds like there may be proposals (including past proposals from President Obama) for new tax provisions. President Obama also stated: "We’ll give new tax credits to businesses that hire and invest." More rules usually leads to greater complexity.
• How does President Obama propose that tax reform, entitlement reform and deficit reduction will be carried out?  Will tax reform focus more on improving the tax system by reducing complexity and improving equity or will it focus on revenue generation to reduce the deficit?  We should know more on this question once President Obama releases his FY 2014 budget soon.

Observations of House Ways & Means Committee Chairman Camp:

• Congressman Camp noted concerns that President Obama is not calling for simplification but calling for higher taxes to reduce the deficit. Camp notes that President Obama should focus on why 90% of individuals rely on a paid preparer or software to calculate their tax liability.

What has President Obama proposed in the past four years? Please see my chart that lists them and categorizes the proposals. I'll update that chart when President Obama releases his FY2014 revenue proposals ("Greenbook").

What do you think regarding what "tax reform" should mean and its prospects?