State of the Union's Call for Tax Fairness is a Good Start
by Sam Rosen-Amy, 1/26/2012
“The state of the union is getting stronger.” That is how President Obama characterized the current state of the union. But, as we wrote in our State of the Union preview on Tuesday, we still have a long way to go before the economy is back on its feet. In our article, we recommended doing away with the looming budget cuts, increasing taxes on capital gains and financial transactions, and using the additional revenue to pay for more infrastructure projects and public protections. So what fiscal issues did Obama talk about in his speech on Tuesday?
One of the main themes of the speech was fairness, which we said was important for creating opportunity and building a vibrant middle-class. First, the president again called for the tax code to follow the “Buffett Rule,” which would ensure that millionaires such as financier Warren Buffett pay at least as much in taxes as their secretaries. In his “blueprint” document accompanying the speech, Obama interprets the rule as meaning millionaires should have an effective tax rate of at least 30 percent.
However, he is unclear on exactly how this would be accomplished. The only specific policy change mentioned is limiting tax breaks for millionaires, saying “there is no reason that those making over $1 million per year should get any tax subsidies for housing, health care, retirement, and child care.” (And even this policy provision is ambiguous; is the president proposing eliminating itemized deductions and all credits for anyone making more than a million dollars?) But this policy change alone most likely won’t increase most millionaire’s tax rates, since their low rates are often a function of the preferable tax treatment of capital gains.
As we wrote in our Watcher article, the best way to increase fairness in the tax code is to treat capital gains (which is profit from stocks, bonds, and other investments) as ordinary income (such as wages). Right now, the top capital gains rate is less than half the top rate for wages, which allows millionaires, such as Mitt Romney, to have a low tax rate. While the president has called for allowing the upper-income Bush tax cuts to expire, which would bring the top capital gains tax rate up to 20 percent from 15 percent, he has resisted advocating for taxing capital gains like wages (for the wealth, this would mean a tax rate of 35 percent on capital gains). However, his argument for millionaires to pay at least 30 percent of their income in taxes functionally amounts to the same thing.
We also wrote about infrastructure spending in our State of the Union preview, saying that such spending (in the form of grants to the states) is one of the best ways the government can boost the economy. In his speech, the president proposed increasing infrastructure spending, and paying for it with half of the savings from the troop drawdowns in Iraq and Afghanistan. This proposal would add approximately $500 billion to infrastructure spending over the next ten years, based on estimates included in the president’s fall deficit reduction plan. According to the Congressional Budget Office, that much spending could – thanks to multiplier effects - spur the economy by more than a trillion dollars, while giving the nation’s workforce a helping hand.
The most disappointing budget news was that the president appears to be sticking by the cuts contained in the Budget Control Act (BCA, also known as the debt ceiling deal). He praised these cuts several times in his speech, and even called for more deficit reduction on top of the BCA. These cuts of almost two trillion dollars over the next nine years will slow our nascent recovery. However, if taxes on the wealthy are raised and all the Bush tax cuts expire, such cuts won’t be necessary to reduce the deficit.
The BCA's budget cuts are already written into law, whereas many of the changes Obama called for in his State of the Union speech require congressional approval. So, if nothing new passes this year (with Congress mired in partisan gridlock and elections swiftly approaching, this seems likely), the budget cuts will go forward as planned, and we’ll have a de facto austerity budget in place. This will be damaging to the economic recovery effort and would set back efforts to make this a more fair and equitable nation.