By seeking tax hikes from high-earners and corporations in order to cut the federal deficit, and promising to veto any deficit reduction plan that doesn’t include tax increases, Obama has set himself up for a particularly caustic fight not only with congressional Republicans but also with an inflamed business community. Business leaders who spoke with The Fiscal Times dismiss the ten-year deficit reduction plan he unveiled this morning in the Rose Garden as economically brainless and a painful distraction from meaningful tax code reform.
Half of the savings in Obama’s $3 trillion plan—or $1.5 trillion—comes from repealing the Bush-era tax cuts for couples earning more than $250,000 a year, curtailing deductions and tax breaks for high-income filers and corporations, and killing subsidies for oil and gas producers. The plan also re-targets many of the same loopholes the Obama administration pushed Congress to eliminate last week to pay for a $447 billion jobs package—namely cutting the “carried interest” tax break for hedge fund and private equity fund managers, eliminating tax benefits for corporate jet owners, and giving wealthy taxpayers smaller tax breaks on their mortgage interest, charitable contributions, and state taxes.
Public opinion is on Obama's side, which is not surprising, since 46 percent of all Americans pay no federal income tax. In a recent Wall Street Journal/NBC poll, more than half the independent voters said a combination of spending cuts and tax increases was acceptable to reduce the deficit. But will that approach really work?
“Real tax reform is different than simply subjecting businesses to tax increases,” said Caroline Harris, chief tax counsel at the U.S. Chamber of Commerce. “Targeting proven job creators is not the way to drive job or economic growth….It kills the very economic growth we need to truly get out of this situation.”
But one new proposal out today seems to be generating the most controversy in the business world. Obama urged Congress to set a minimum tax rate on taxpayers making $1 million or more in income to bar millionaires from paying a smaller percentage of their income in taxes than middle and upper-middle income Americans, which currently. The Obama Administration is presenting it as a replacement for the alternative minimum tax—a tax which was originally intended to ensure the wealthiest taxpayers who collected deductions and credits still paid income taxes, but has since been levied on millions of upper middle class Americans. Obama coined the proposal the “Buffett Rule,” for billionaire investor Warren Buffett, who in recent weeks has criticized a tax system that has “coddled” his fellow investment moguls, allowing them to pay a smaller share of their income in federal taxes than middle-class taxpayers.
Millionaires often pay lower effective tax rates because investment income is taxes at a lower rate than regular wages. Millionaires pay a 35 percent tax rate on income, while middle-class taxpayers typically fall into the 15 or 25 percent bracket. But since a disproportionate share of millionaires’ income comes from capital gains through investments—which are taxed at a 15 percent rate—the slice of income tax they end up paying is proportionally smaller.
“There is no argument for capital taxation on economic efficiency grounds…the optimal tax on capital is zero,” said Glenn Hubbard, dean of Columbia Business School and chairman of the White House Council of Economic Advisers under George W. Bush. “It would be great to move beyond the silly season in the President’s proposal to a real discussion of tax reform.” Media mogul and former Republican presidential candidate Steve Forbes echoed Hubbard this morning on CBS: “He’s [Obama] trying to say the rich are the problem—that if we get rid of the rich or tax them more everything will be well….But if you punish the people that take risks, most new ventures lose money,” and businesses and individuals will hoard that valuable capital, he cautioned.
Jack Gerard, president and CEO of the American Petroleum Institute, said the tax changes in the president’s plan would destroy jobs and unfairly punish five big integrated oil and gas producers. “This isn’t smart tax policy,” Gerard told The Fiscal Times. “This is a punitive policy designed to punish one industry—and industry which has the potential to help create a million jobs. Wrong approach.”
But the Obama administration says just the opposite: that its new plan will help steer the 12-member Super Committee —charged with identifying at least $1.2 trillion in deficit reduction by Thanksgiving—toward overhauling the federal tax code. “The plan calls for the Congress to undertake comprehensive tax reform that lowers tax rates, closes loopholes, and boosts job creation here at home,” he said today in the Rose Garden. Democrats and Republicans for years have said they want to overhaul the dense and loophole-ridden U.S. tax system as a way to spur economic growth and maximize the revenue yield. Treasury Secretary Timothy Geithner has said on multiple occasions that the administration supports revenue neutral tax reform, which in the near term, would not help reduce the federal deficit. But this morning he did say that tax reform is a critical component in making the U.S. a more attractive investment environment. "If you do it [deficit reduction] sensibly through tax reform you'll strengthen investment centers, you'll make growth in the U.S. stronger, you'll make people more confident in the future, more likely to invest here,” Geithner told reporters this morning.