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 elections in ways that will help Democrats keep the White House.
In his State of the Union address Obama proposed a host of tax ideas that 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 foolproof. 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, R-Utah, who chairs the Senate Finance Committee, said Obama was fomenting “class warfare.” Rep. Charles Boustany, R-La., who chairs the tax-writing Ways and Means Committee, called the president’s proposals “just another poke in the eye at Republicans.”
Obama’s plan, which has no chance of adoption by the Republican majorities in the House and Senate, would raises taxes on the top one-half of 1 percent to benefit those in the middle class who pay taxes, plus individuals among the working poor.
His proposals would cost $230 billion over 10 years, or less than $2 billion per month. This modest tax relief for middle class Americans would be paid for by raising taxes at the top by $320 billion, or a bit more than $2.6 billion per month.
The difference would be used 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 he 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 a year — roughly the top one-tenth of 1 percent. He 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 one-half of 1 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; more than half of Republican polled supported a 50 percent tax rate on incomes of more than $1 million annually.
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, a British charity, issued a report showing that next year more than half the planet’s wealth will be owned by just 1 percent of the global population. Credit Suisse, in a separate report on inequality, said that just 80 people have 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 share of dividends going to Americans making $2 million a year or more rose from 50 to 62 percent in that time.
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.
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 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.