State of the Union Address: Good on Principles, Weak on Policy

During his State of the Union Address, President Barack Obama reiterated the principle that the United States must prioritize getting rid of tax loopholes for the wealthiest individuals and most profitable corporations in order to ensure that everyone is paying their “fair share” to reduce the deficit. While in principle it’s hard to argue with this approach, the tax policy agenda the President laid out during his speech does not go nearly as far as it should both in terms of deficit reduction and correcting the inequities in our tax code.

Buffett Rule Not Enough to Ensure Fairness
For example, during the speech President Obama called for a tax code that would ensure that “billionaires with high-powered accountants” do not pay a lower tax rate that their “hard-working secretaries.” His proposal to accompany this principle has been the so-called “Buffett Rule,” which would require everyone making over a million dollars to pay a minimum effective tax rate over at least 30 percent.

But this would still leave in place the preferential rate on capital gains and dividends that is the primary reason that wealthy investors like Warren Buffett have such low effective tax rates. A better approach would be to end the special treatment of capital gains and dividends, which would both raise more revenue and deal with the core issue of fairness.

Truly Ending Offshore Corporate Tax Dodging Requires More
Turning to corporate taxes, President Obama said that we need a tax code that “lowers incentives to move jobs overseas and lowers tax rates for businesses and manufacturers that are creating jobs right here in the United States of America.”

To start, rather than calling for a measure that simply “lowers incentives,” Obama should address the problem at its root, by repealing the rule allowing corporations to defer – indefinitely – taxes on their offshore profits.  (Those profits, of course, are often artificially shifted offshore with the goal of avoiding taxes.) This exact reform was recently introduced in both the House and Senate in the “Corporate Tax Dodging Prevention Act.”

Corporate Tax Reform Must Raise Revenue

In addition, while it’s great that President Obama is proposing to get rid of a myriad of corporate tax breaks, it is not entirely clear that he intends to wisely use the revenues it would generate. His 2012 corporate tax framework, for example, calls for the revenue generated by closing loopholes to be spent on lowering the overall corporate tax rate and even expanding some of the breaks for manufacturers (which really don’t warrant the special treatment); this proposal to keep corporate tax reform revenue-neutral meant that corporations would continue to pay a low effective corporate tax rate overall and have no positive impact on the budget.

In his State of the Union Speech, however, he implied that corporate tax reform should also result in revenues to help bring down the deficit, and this more recent rhetoric about using the revenues for deficit reduction is certainly promising. What should come next is a clear rejection of revenue-neutral corporate tax reform and an explicit commitment to boosting corporate tax revenues in order to fund investments that benefit all Americans, including the consumers that keep corporations profitable.

Balanced Approach? Spending Cuts for Deficit-Reduction Have Already Been Enacted

Addressing the sequestration cuts scheduled to kick in March 1, President Obama used the State of the Union address to reiterate his commitment to include a mix of revenues and spending cuts as part of a “balanced approach” to deficit reduction, saying we should not “make deeper cuts to education and Medicare just to protect special interest tax breaks.” Citizens for Tax Justice has noted (as did the President in his speech) that the last several rounds of deficit reduction have already relied primarily on spending cuts.  Logically, then, to achieve true “balance” in reducing the deficit, the sequester should be replaced almost entirely by revenue increases.  That makes the President’s offer of more cuts unwarranted.

If enacted as is, the tax ideas President Obama outlined in his State of the Union address would be important steps towards reducing the deficit and improving the fairness of our tax system. If enacted following legislative compromise, they would likely be much smaller steps. But in any event, the President’s articulated goals would still leave gaping inequities in our tax code, and not do enough to ensure that we have the resources to make critical investments in our long term economic health.