Politics

Obama Transforms Tax Hikes Into Spending Cuts

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Behold the awesome power of my words: On the very same day that I condemn the bewildering complexity of our tax code and recommend swapping credits, deductions, and exemptions for lower rates, President Obama gives a speech in which he calls upon Congress to "reform our individual tax code so that it is fair and simple—so that the amount of taxes you pay isn't determined by what kind of accountant you can afford." Coincidence? Well, yeah, but the lip service to reform does seem to reflect a consensus that might actually result in action. The president's fiscal commission, the budget plan that House Republicans are considering this week, and the president himself all support the goal of cutting tax rates while "broadening the base" by curtailing or eliminating so-called tax expenditures. But while the Republicans want reform to be revenue-neutral, Obama's debt reduction plan (such as it is) relies on revenue from limiting deductions for wealthier taxpayers, and his vision of tax reform probably includes additional money grabs.

Tellingly, The New York Times defines "tax expenditures" as "payments to taxpayers for deductions for charitable donations or home mortgages," as if letting people keep more of their own money is the same as giving them subsidies.* The Times notes that "the use of the phrase 'tax expenditures' allows the administration to lump tax-related issues into the spending category"—i.e., to describe tax hikes as spending cuts, which is a pretty neat trick. Similarly, it reports that "Mr. Obama attacked the demand by Republicans to make the lower tax rates permanent as emblematic of their plan to enrich the wealthy on the backs of the elderly and poor." This description of House Budget Committee Chairman Paul Ryan's fiscal plan reflects the president's view that people have whatever money they have only by the grace of government, which has the legal and moral authority to rearrange it at will. Hence declining to raise taxes to pay for open-ended, ruinously expensive health care entitlements is the same as robbing the poor to pay the rich. These dueling perspectives have a Randian ring.

Philosophy aside, there is a pragmatic case for keeping the tax reform issue separate from the question of whether dealing with deficits requires additional revenue. National Taxpayer Advocate Nina Olson puts it this way in her latest report to Congress:

We cannot pretend that broadening the tax base means eliminating someone else's tax break while preserving our own. everything must be put on the table, and we must make clear that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. But it is equally important to make clear that, assuming revenue neutrality, the average taxpayer will not pay more tax and the tax code will be much easier to understand and comply with….

We are mindful that leaders of both parties have expressed deep concerns about the long-term structural imbalance between government revenues and government spending, and that in addition to spending cuts, tax revenues at some point may have to be increased. We are also mindful that the question of whether and to what extent to raise revenue is extremely contentious.

If structural tax reform and revenue levels are considered together as part of a package, we are concerned that the debate over revenue levels could overshadow and derail meaningful tax reform. therefore, we suggest that congress consider addressing these issues separately. First, Congress could enact structural tax reform on a revenue-neutral basis. Second, Congress could decide on appropriate revenue levels and adjust the tax rates as it deems appropriate.

I would prefer that Congress skip Stage 2 altogether. But even those who share Obama's fiscal preferences have to recognize the political reality that Olson highlights: It is hard enough to persuade people to give up their cherished deductions in exchange for a promise that their tax bill won't go up as a result. If reform is tied to tax hikes from the beginning, as Obama already is doing, what hope is there for selling it to the public?

I commented on Obama's view of tax deductions in a 2009 column.

*Addendum: While refundable tax credits are tantamount to subsidies, since you can get them even if your tax bill is zero, deductions are not, since they simply reduce the amount of money the government takes from you. That does not mean they are good policy (they're not), but the distinction is important for anyone who rejects the view that all resources belong to the collective. For a more detailed consideration of deductions vs. refundable credits, see Tax Foundation President Scott Hodge's recent testimony to the House Budget Committee.