State of the Union address pushes tax reforms to set stage for 2016 electoral fight
January 21, 2015
2:00AM ET
The most political law in America is the federal tax code. Far from
being grounded in sound economics and the Constitutional duty to promote
the general welfare, it’s shaped by influence won with campaign
contributions and lobbying. We are about to see just how political tax
law is thanks to a savvy move by President Barack Obama to frame the
2016 election in ways that will help Democrats keep the White House.
In his State of the Union address, the president proposed a host of
tax ideas Republicans have long advocated in order to force them to
choose between Main Street and Wall Street. He believes they will side
with the rich, whose campaign donations are increasingly significant in
elections and whose companies provide jobs for friends and family of
politicians.
But the president’s strategy is not full-proof. There is a clever way
for congressional Republicans to turn his proposal into a trap for the
Democrats.
Obama’s tax plan
Obama’s proposals are pro children, family, savings and work. He
would prevent a scheduled 11-percent tax increase in 2017 for full-time
workers earning the minimum wage. He also wants tax simplifications that
the IRS Taxpayer Advocate — a post that GOP lawmakers created in 1998 —
has urged annually, to no avail.
Top Congressional Republicans immediately dismissed these proposals.
Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, said Obama was fomenting “class warfare.” Rep.
Charles Boustany,
the Louisiana Republican who chairs the tax-writing Ways and Means
Committee, called Obama’s proposals “just another poke in the eye at
Republicans.”
The president’s plan, which has no chance of adoption by the
Republican majorities in the House and Senate, would raises taxes on the
top half of one percent to benefit those in the middle class who pay
taxes plus individuals among the working poor.
Obama’s proposals would cost $230 billion over ten years — less than
$2 billion per month. The cost of this modest tax relief for middle
class Americans would be paid by raising taxes at the top by $320
billion — a bit more than $2.6 billion per month.
The net effect would be to further reduce the federal budget deficit.
Republicans have steadily hammered Obama for increasing the federal
debt even though on his watch the annual federal budget shortfall, the
deficit, has fallen from 10 percent of the economy to under 3 percent.
By the time Obama leaves office in two years the budget may even be in
surplus for the first time since Bill Clinton’s presidency.
Polling suggests that Americans are increasingly aware of rampant inequality, especially as their own fortunes decline.
Most of the Obama tax increases would fall on people who inherited
their wealth and those with incomes of more than $2 million — roughly
the top tenth of one percent. Obama would raise the capital gains tax
rate on incomes above $500,000 to 28 percent, the rate signed into law
by President Ronald Reagan in 1986. Only the top half of one percent
would be affected by this increase, which would not apply to salaries.
He also wants capital gains taxes paid on appreciated assets people
inherit, closing what the White House calls the “trust fund loophole.”
Obama’s proposals have popular support. Large majorities of
Americans, polls show, believe the best off Americans should pay more
taxes.
Surveys
report that many Republicans favor high taxes on the rich, including
one in which more than half of Republicans supported a 50-percent tax
rate on incomes of more than $1 million annually.
Growing inequality
Such polling suggests that Americans are increasingly aware of
rampant inequality, especially as their own fortunes decline. Obama’s
State of the Union address came the day after OxFam, the British
charity, issued a
report
showing that next year more than half of the planet’s wealth will be
owned by just 1 percent of the global population. Credit Suisse, in its
own
report on inequality, said that just 80 people own as much wealth as the poorest 3.5 billion people.
This growing concentration of wealth is largely driven by government
policies, including reducing tax rates on the highest incomes, radically
reducing audits of the wealthy and of corporations and a plethora of
complex regulatory rules that take from the many to benefit the few, all
of which I have been exposing for two decades.
In America real per capita income was
$1,000 less in 2012 than in 2000. The same period saw
a severe narrowing
of stock and bond ownership. The number of taxpayers reporting capital
gains, for example, fell from 1 in 8 in 2000 to 1 in 15 in 2012. The
total share of dividends going to Americans making $2 million or more
rose from 50 to 62 percent in that time period.
Inequality has become such a major issue that even former Republican presidential nominee
Mitt Romney
sought last week to remake himself into an economic populist as he
readies a possible third campaign for the White House. “Under President
Obama the rich have gotten richer, income inequality has gotten worse
and there are more people in poverty in American than ever before,”
Romney said to Republican National Committee members in San Diego on
Jan. 16.
Republican strategy
If the Republicans instead follow the lead of Hatch, Boustany and
Sen. Marco Rubio of Florida, it will enable Democrats in the 2016
elections to pillory them as tools of the plutocrats with no real
concern for most Americans.
That may not help much in House races, where gerrymandering by state
legislatures has corralled Democrats and their allies into highly
concentrated districts. But it could provide a big boost in 2016 for
Senate races and the race for the White House, where demographic factors
favor the Democrats.
But Republicans could turn the tables on the president if they think
strategically. Instead of dismissing the proposals, they could strip out
the tax increases on the wealthy in the bill and pass the rest of it as
presented.
That would put Obama in the hot seat. He could veto the bill because
the tax relief for the middle class would not be paid for from higher
taxes on the wealthy, but that decision might anger middle-class voters
who wanted lower taxes. Or he could sign it, leaving the rich with their
tax breaks and risking public scorn for lacking a set of principles
while also allowing the federal budget deficit to increase.
However this fight goes, keep in mind that what we will witness is
not real tax reform, tax simplification or basing tax burdens on the
common sense principle of ability to pay. It’s all about electoral
politics.
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