President Obama and Tax Reform

White House website; speech of 7/30/13

On July 30, 2013, President Obama laid out some items he would like to see as part of tax reform. A lot of pieces are missing, but given some of the things he said, such as lowering the corporate tax rate, bringing jobs back to the US, helping manufacturers, and simplification, I think he is likely talking about parts of the revenue items in his budget proposals of recent years and his tax reform frameworks.  I have these items laid out in a table that I assembled in May 2012 - here. I need to update it for his FY2014 budget proposals released in April, but many of the tax items are similar to his FY2013 budget (other than the need to address the Bush tax cuts).

Here is a summary from the White House website:

"Simplify the tax code for business

• End incentives to ship jobs overseas
• Lower tax rates for businesses that create jobs in the U.S.
• Lower tax rates for manufacturers
• Cut taxes for small businesses

Create good jobs

• Put construction workers on the job rebuilding our infrastructure
• Expand our network of high-tech manufacturing hubs
• Strengthen job training at community colleges
• Raise the minimum wage"

President Obama stated he would like to see tax reform paired with funds for spending to improve our infrastructure.  It is not clear how he will lower the corporate tax rate and generate funds - at least from what he said on July 30.  If you look at his FY2013 and FY2014 budgets, you'll see he can generate a lot of funds from increasing taxes of high income taxpayers (over $250K).  That includes cutting back on the tax benefit of itemized deductions and some exclusions, as well as implementing the "Buffett rule." The first item is the biggest revenue generator - about $40 billion per year. That's a lot compared to about $7 billion per year for repealing LIFO. And repeal of LIFO is really a timing difference, the other is a permanent tax increase.  (See page 343-344 of the Administration's FY2014 Greenbook.)

We need more details. I'll offer a few things to think about for now:

• Does he plan to lower only the corporate tax rates or also those for individuals? Most businesses operate outside of the corporate form. Also, to pay for the lower corporate tax rate, he'd have to reduce business breaks and that would affect all businesses (probably).
• It looks like he still wants to lower the corporate tax rate in a complex and not fully transparetn way - by increasing the Section 199 manfuacturing deduction for certain industries.
• Does everyone want a lower rate? Remember that only the top 1% of individuals are in the top rates. Even many large corporations today use existing tax rules to reduce their effective tax rate to below 25%.  A recent poll of small businesses by the US Chamber of Commerce found that 56% wanted a simpler tax law and only 22% wanted lower rates.
• Revenue neutral reform to lower corporate and individual rates to 25% which many Republicans are talking about will be hard pressed to find revenue unless they go after the bigger tax expenditures, such as the one President Obama has suggested about capping the benefit of certain deductions and exclusions at 28% and reducing the mortgage interest deduction.

President Obama says he will lay out more details over the next few months.  Sounds like a good strategy so he can gauge responses along the way and slowly try to build support.

What do you think?

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?

Will Obama and Romney list the tax subsidies they will cut for lowered rates?

The calls for lower tax rates come along with vague calls for cutting tax expenditures or base broadening. I say vague because we rarely hear which specific deductions, exclusions or credits will be cut or scaled back. I say rarely because there are a few example. President Obama's FY2013 budget calls for cutting back on some preferential rules for oil, gas and coal producers.

Politics is a likely reason for the vagueness.  I suspect that most voters think the cuts would be for corporations  because they think that is where the bulk of benefits go.  But that is incorrect. Per data from the Joint Committee on Taxation, the largest tax break for individuals is the exclusion for employer-provided health insurance which costs $659.4 billion for 2010-2014. In contract, the most costly corporate tax expenditure is about 1/10 that size (it is for deferral of active income of controlled foreign corporations and costs $70.6 over the same five year period).

Here is an excerpt of a chart from the JCT report (JCX-15-11, page 25):

Clearly, to truly generate revenue to reduce both the corporate and individual rates, individual tax expenditures will need to be reduced.  There are additional good reasons to reduce or eliminate many of them, such as equity/fairness, neutrality, economic efficiency and simplicity.

What politicians need to be asking is - why do 70% of individuals want to subsidize home ownership for 30% of individuals who deduct mortgage interest?  Why do we spend roughly $90 billion per year to help middle and upper income individuals buy a more expensive home than they would otherwise purchase? Why do we subsidize borrowing to help someone purchase a vacation home?

But, how willing are politicians to do this when the questions are most likely to be misunderstood because the public has not been exposed to the data on the cost of tax expenditures and how inefficient and inequitable they are.

Yet, some of that may be starting. H.R. 6169 that passed in the House on August 2 refers to much of  the above as spending and subsidies.

What do you think?

"Tax hike" misleading, overlooks call for big tax cut. What about tax policy?

Some recent news stories and blogs refer to President Obama's call to only extend tax cuts for the 97% of individuals with income under $200,000 ($250,000 if married filing jointly), as a "tax hike" for the 3% with incomes above that level. (Just do a Google search using: "Obama" "tax hike" "2012," and you'll find various places using that term including some think tanks.)  

This overlooks the history of how we got here.  Back in 2001 and 2003, various tax cuts were enacted including rate reductions, a higher child credit and a reduced rate on qualified dividends (15%). These cuts were enacted to expire at the end of 2010. In December 2010, Congress and President Obama extended them all for 2 more years. So, at the end of 2012, the cuts automatically expire. To keep any of them, legislation must be enacted. So, why aren't calls for renewing lower tax rates and higher tax breaks for 97% of individuals a call for a "tax cut"?  Legislation enacted to accomplish what President Obama proposes will be a revenue losing bill.

How much revenue?  The Administrations FY 2013 Greenbook provides some insights, but not obvious ones.  You have to dig into the footnotes and do some calculations. The revenue estimates in the FY2013 Greenbook assume a baseline where the 2001 and 2003 tax cuts are permanently extended for all individuals. This then allows for showing a revenue increase if these tax cuts are not extended for upper-income individuals. Table 2 of the FY2013 Greenbook (page 206) shows that the cost of extending the tax cuts for all individuals for 2013 through 2022 (ten years) is $2.2 trillion. The Joint Committee on Taxation has also estimated the budget effects of the FY2013 revenue provisions from President Obama. The dollar amounts are close to, but not exactly equal to those included in the Greenbook. See Joint Committee on Taxation, Estimated Budget Effects Of The Revenue Provisions Contained In the President’s Fiscal Year 2013 Budget Proposal, JCX-27-12 (3/14/12). 

So, extending tax cuts for all individuals costs $2.2 trillion over 10 years. How much is that reduced by not extending them for the top 3%? The Greenbook also has that. Here is a summary:

Proposal	10 year estimate (in millions)
Reinstate the limitation on itemized deductions for upper-income taxpayers	$122,985
Reinstate the personal exemption phase-out for upper-income taxpayers	$41,942
Reinstate the 36% and 39.6% tax rates for upper-income taxpayers	$441,554
Tax qualified dividends as ordinary income for upper-income taxpayers	$206,415
Tax net long-term capital gains at a 20% rate for upper-income taxpayers	$35,966
Total	$848,862

So, if the cost to extend tax cuts for everyone is $2.2 trillion and we subtract $849 billion for not renewing them for the upper 3%, it looks like a proposal for a $1.3 trillion tax cut, not a tax hike.

Now, President Obama does have some true tax hike proposals in his FY2013 Greenbook, including reducing the value of certain deductions and exclusions for upper income individuals. He also proposes some additional tax cuts, but his largest tax cut stems from the proposal to extend the tax cuts for 97% of individuals.

Discussions of a "tax hike" means that the BIG question of how a $1.3 trillion tax cut over 10 years will be paid for is overlooked.  This all also distracts from discussions of what is the appropriate tax policy (design) for our income tax.  What about having a discussion that addresses these questions:

1. What is the appropriate income tax rate structure for a progressive income based on today's income quintiles?
2. Should capital gains and dividends be taxed at the same rate as other income?
3. How does the corporate tax rate tie to answering question 2?
4. What is the appropriate income tax base?  Every tax preference (special deduction and exclusion) should be evaluated. If it serves no purpose, end it or phase it out. This will help pay for lower rates, and make the tax system more equitable and simple.
5. What tax credits, if any, should be included in the income tax?
6. How does data on income distribution and the poverty level affect the tax rate, base and credit questions?

That's just a few tax policy questions we need to answer.  Unfortunately, the focus on "tax hikes" and other misleading statements (such as the effect on "small business" of not extending the tax cuts for the top 3%), distract from the facts and from having a much needed tax policy discussion.

What do you think?

President Obama's Business Tax Reform Plan

Near the end of February 2012, President Obama released his business tax reform plan which had been hinted at for some time.  In his 2011 State of the Union address he said he favored a lower tax rate achieved in a revenue neutral manner. His Feb 2012 plan lays out some of the details, but many items are still a bit general, such as eliminating accounting gimmicks.

I have a short article on the plan with observations offered by me. See AICPA Tax Insider (3/8/12) - President Obama's Business Tax Reform Plan.

What do you think?

Obama Tax Task Force to Miss December 4 Deadline

President Obama's Tax Task Force was supposed to issue its report on Friday 12/4/09. Paul Volker, Chair of the task force has announced that the report will be delayed. He notes that they received over 500 comments and had to cut off submissions due to the 12/4 deadline. The comment page has been re-opened (see above link).

This is not surprising. They did not have much time and had a lot to consider. Hopefully they will take a careful look at the numerous ideas already studied about tax simplification and how to reduce the tax gap (such reports have been issued for years by the Joint Committee on Taxation, Treasury, GAO, AICPA, ABA and many others).

Do you plan to submit comments?