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If yesterday’s election was a referendum on taxes, what voters rejected was the tired oldargument that cutting taxes is good for an ailing economy, and that is a welcome development. For his part, President Obama has said winning would give him a mandate to raise revenue by ending the Bush tax cuts for the wealthiest Americans, one of his campaign promises. Republicans have said if he follows through on that promise, it will destroy any chance of the two parties working together in the coming years.

As we head into the lame duck Congressional session that begins next week and look ahead to 2013, let’s review the (frankly) uninspiring policy options both parties are proposing – proposing for a country where tax rates are at historic lows, income inequality is at historic highs, tax avoidance by the wealthy and corporations is epidemic and revenues are anemic.

Sadly, President Obama’s “balanced” fiscal plan comes up short.  Far from raising needed revenues or “raising taxes on the rich” as many describe it, the President’s plan actually cuts taxes dramatically for most Americans. If President Obama’s plan to keep all but the high end Bush tax cuts in place is implemented, the lion’s share of the unaffordable and unfair tax cuts pushed through by President George W. Bush more than a decade ago would remain in place for another year, through the end of 2013 – at a one-year cost of $250 billion or more.

Whether the President succeeds in getting a grand bargain that includes a one year extension of most of the Bush tax cuts, or we end up with the Republicans’ latest idea for a six month “bridge” across the fiscal cliff, what both parties are saying is that the time they buy with these bargains will be used to rewrite the tax code in a permanent way. And while we agree that some kind of tax code overhaul is necessary, any overhaul that fails to raise revenue and increase tax fairness is not worthy of the word “reform.” 

Our corporate tax system is currently in a shambles, with hugely profitable multinational corporations aggressively using shady tax dodges as well as tax breaks enacted by Congress to zero out their tax bills.  Unfortunately, most Democrats and Republicans are listening to corporate lobbyists’ complaints that the U.S. statutory corporate income tax rate of 35 percent is too high.  This complaint is largely baseless.  We studied most of the Fortune 500 corporations that were consistently profitable in recent years and found that they collectively paid just 18.5 percent of their profits in taxes, and many paid nothing at all.  Still, most plans for corporate tax reform from both sides of the aisle call for closing loopholes only to lower the rate, resulting in no new revenues for the Treasury. 

We acknowledge, however, that Democrats have articulated some encouraging goals. In Congress, for example, Senator Carl Levin is actively working to close loopholes that allow corporations to shift profits to offshore tax havens. And President Obama has indicated he wants to restrict the most egregious corporate loophole, the rule allowing corporations to “defer” paying taxes on their foreign profits (which are often U.S. profits artificially shifted offshore).  Contrasted with the Republican Party’s support of a territorial tax system that permanently widens that loophole and exempts all foreign profits, the President’s corporate tax framework looks progressive, even if it is woefully short on detail.

Our view, though, is that ending “deferral” entirely is the only road to real reform of the corporate tax. In this global economy, deferral is the massive hole in which our most profitable companies can legally hide their profits, even as those profits are at historic highs.  

And the personal income tax, with or without the Bush tax cuts in place, contains expensive and unwarranted loopholes that make it possible for wealthy investors to pay taxes at a lower rate than middle-income workers – as Warren Buffett has so helpfully illustrated.  There is a simple way to fix this, of course, and that is to tax capital gains and dividends the same way we tax income from salaries and wages.  Other provisions of the personal income tax (like tax breaks for charitable deductions on appreciated property and the “carried interest” loophole) can be reformed or eliminated so that they no longer provide tax shelters for the richest Americans.  But it’s the low rates on capital gains (and dividends) that overwhelmingly benefit the very wealthiest Americans, and tax reform that maintains a progressive federal income tax must end that special break.

Tax policy is often inscrutable, and one aspect that can complicate and thwart a constructive public discussion is the issue of which “baseline” or assumptions an analysis begins with.  For example, there are those who characterize the scheduled expiration of the Bush tax cuts as a tax increase.  Don’t believe them. Nor should you believe those who say that President Obama’s proposal to extend most of the Bush tax cuts would “raise revenue.” By law, the Bush tax cuts are still temporary and are set to expire at the end of this year.  Allowing them all to expire is not a tax increase, and the President’s approach to extending most of them would result in less revenue (and a much higher budget deficit) than we’d get if Congress just did nothing, let the Bush cuts (and scores of smaller temporary tax expenditures) expire and went home.

Indeed, Congress simply going home next month and allowing the Bush tax cuts to expire on January 1, 2013 would not be the worst result.  You hear people say that we can’t possibly allow all the Bush tax cuts to expire because they benefit low- and middle-income Americans who need help, especially right now. But this is no reason to enact a bill that also extends tax cuts for the rich, which are far larger, and that’s exactly what it would mean to extend the Bush tax cuts wholesale. We’ve estimated that if Congressional Republicans get their way and all the Bush tax cuts are extended, 32 percent of the benefits would go to the richest one percent of Americans and just one percent of the benefits would go to the poorest fifth of Americans. Under President Obama’s approach, 11 percent of the benefits of the extended tax cuts would go to the richest one percent of Americans and three percent of the benefits would go to the poorest fifth of Americans. Clearly Obama’s plan is the fairer one, though it’s hardly something to celebrate.

The White House and Congress will be working on a deal during the lame duck session to tide us over through 2013. If the only deal they can reach is a bad deal – one that preserves all those expensive Bush tax cuts – the President should reject that deal.  We believe the public would support him if he did.

While we aren’t enthusiastic about any of the short term deals we know of, we are hopeful that 2013 can bring positive change to our tax code if Congress follows some basic principles.  Like the historic tax reform of 1986, reform next year should close loopholes in the personal and corporate income taxes.  Unlike ’86, however, it should not be revenue-neutral.  Today, following decades of tax cuts, we have shrinking revenues and swelling deficits.  So the next tax overhaul must raise revenues sufficient to fund the government and provide services citizens deserve and depend on. Real reform will also leave the code fairer than it is today by closing loopholes that have slowly eroded the progressivity the federal income tax was designed to deliver. We know that when you include local and state taxes, lower and middle income Americans are, in fact, paying their fare share.  At Citizens for Tax Justice, our mission is advocating for those taxpayers, and we will continue to do so into 2013 as a still divided Congress and Democratic White House debate reform of the entire tax code.