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Obama's Budget: Piecemeal Politics Or Comprehensive Tax Reform?

05 March, 2015

President Obama recently presented a budget proposal purportedly containing corporate and individual tax reform.  While it may appear that Republicans who have long been pushing for tax reform should eagerly embrace these concessions, in reality, the piecemeal tax reforms contained in the President's plan are a thinly veiled wealth redistribution scheme.  President Obama's recent State of the Union address focused heavily "income inequality."  In the speech, he implored Congress to "close loopholes so we stop rewarding companies that keep profits abroad, and reward those that invest in America" and "close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth."  In other words, rather than focusing on long-term economic recovery, President Obama has once again placed the politics of "income inequality" ahead of substantive policy and meaningful tax reform.

The details of President Obama's economic policy were presented shortly after the State of the Union address in the form of his proposed budget for the 2016 fiscal year.

The President's so-called middle class tax reform includes: 

  1. 2 free years at a public or private community college
  2. a $500 tax credit for working married couples
  3. an increase of the maximum child care credit to $3,000. 

In exchange, Republicans must agree to: 

  1. a $320 billion tax hike over 10 years on individuals making over $500,000 per year
  2. a capital gains tax rate increase to 28%
  3. new fees for "big banks."

Additionally, among the proposals included in President Obama's budget is so-called corporate tax reform which includes three key pieces: 

  1. lowering the corporate tax rate from 35% to 28%, with a special 25% rate for manufacturing
  2. a one-time repatriation tax of 14% on foreign earnings of U.S.-based multinational corporations and their subsidiaries
  3. a 19% minimum global minimum tax on future overseas earnings as they accrue. 

Presumably, these corporate tax proposals are designed to address both issues of corporate tax inversion and infrastructure spending, as the proceeds raised by the one-time tax would be applied to an infrastructure spending initiative

While it is encouraging that the proposed budget addresses corporate tax reform, some fear that it does not adequately address the problem.  Republicans on the House Budget Committee and the House Ways and Means Committee have insisted on comprehensive tax reform to simplify the tax code—both corporate and individual—as opposed to a piecemeal approach.  Rep. Paul Ryan (R-WI), the House's lead tax policy writer, has hesitantly embraced the proposal, but only as part of "properly constructed tax reform," while arguing that, "it has to be part of a conversion to a permanent system." 

Further, members of the business community have complained that certain aspects of the proposed tax rates are excessive.  Economic experts, such as Robert Pozen, agree that the 14% transitional rate for repatriating funds is not politically feasible, arguing that the rate should be below 10%, because "U.S. companies held these foreign profits abroad in reasonable reliance on long standing U.S. tax laws."  An alternate proposal by Rep. Dave Camp (R-MI) sets a transitional rate of 8.75%, while a bipartisan proposal in the Senate by Sen. Barbara Boxer (D-CA) and Sen. Rand Paul (R-KY) proposes a rate of 6.5%, plus a stipulation that the repatriated funds must be used for initiatives such as R & D, public-private partnerships and acquisitions.  Similarly, as for the tax rates on foreign profits going forward, most corporate executives view a 19% global minimum tax as relatively high compared to alternate proposals, such as Rep. Camp's proposed 15% baseline rate.

While President Obama consistently packages this debate in terms of wealth inequality, Republicans insist that they are merely focused on comprehensive tax reform, both corporate and individual, which will benefit everyone.  Rep. Dianne Black (R-TN) of the House Budget Committee has pointed out that the U.S. Tax Code has not been overhauled since 1986.  Further, she says that President Obama's disjointed approach is merely "taking a very complicated tax code and making it more complicated."  Rep. Ryan agrees that wealth inequality is a serious problem but that it can only be addressed by comprehensive tax reforms, asserting that, "The Obamanomics that we're practicing now have exacerbated inequality. They've exacerbated stagnation. They're making things worse."

While President Obama's budget proposal masquerades as a starting point for negotiation on tax reform, his rhetoric clearly indicates that he is actually focused on class warfare.  Rep. Ryan has characterized President Obama's budget proposal as "envy economics."  Indeed, President Obama's recent attacks on corporations' attempts to remain globally competitive by casting aspersions on their "unpatriotic" decisions, together with the income inequality rhetoric from his State of the Union address, lend credence to this view of his true motives.  Offering small, piecemeal tax concessions in exchange for punitive taxes on wealthy individuals and businesses who do not, in his view, pay their fair share, is merely a wealth redistribution scheme in disguise.  Unless President Obama submits a budget plan focused on long-term financial stability which benefits economic recovery instead of political considerations which benefit himself and his party, the Republicans should stand firm in defense of substantive, meaningful tax reform.

Carrie A. Lowery, Esq., has worked as a legal professional for over a decade. She recently founded Authority Legal Research & Writing Service, which provides legal research and writing support to practicing attorneys. She is a frequent contributor to TheCapitalPress.com

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