Taxes

Obama's Tax Simplification: A Cover For Targeted Tax Hikes?

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When President Obama announced his most recent jobs plan in a primetime speech to the joint Congress, he assured America's legislators that it would be paid for. How? Well, the details would come a little later. Today, in a morning speech on the White House lawn, the president provided the rest of the story, proposing, as Nick Gillespie noted earlier today, about $3 trillion—half spending cuts, half tax hikes—designed to both pay for his jobs plan and provide additional deficit reduction.

The Explainer.

Obama pitched his tax hikes, most of which tweak or eliminate existing targeted tax breaks, as a step toward tax reform, and a necessity given ongoing trillion-dollar federal deficits and mounting national debt. "This plan eliminates tax loopholes that primarily go to the wealthiest individuals and corporations," he said. "We can't afford these special lower rates for the wealthy…we can't afford them when we're running these big deficits."

But closing those loopholes won't get you very far. According to The Washington Post, "if the goal is debt reduction, that's not where the money is." Relatively speaking, there's not that much to be gained from tweaking loopholes and carve-outs for corporations and high earners:

Broad tax breaks granted to millions of families at all income levels dwarf the corporate giveaways. Over the past two years, largely because of these popular benefits in the federal income tax code, the government has reached a rare milestone in tax collection — it has given away nearly as much as it takes in.

…All told, federal taxpayers last year received $1.08 trillion in credits, deductions and other perks while paying $1.09 trillion in income taxes, according to government estimates.

Only about 8 percent of those benefits went to corporations. (The write-off for corporate jets equals about .03 percent of the total.) The bulk went to private households, primarily upper-middle-class families that Obama has vowed to protect from new taxes.

Obama is actually right that the current tax code is a mess. The American economy would be better off with a simpler system that isn't riddled with complications and special exceptions. A simpler system would also allow for lower across-the-board rates. But the president's proposal, which merely selects a handful of politically convenient carve-outs for elimination, wouldn't simplify the system in any way that really matters in the broader scheme of things. If anything, the administration is using the tax code's complexity to its own advantage, framing targeted tax hikes as a form of tax-code simplification.