Posturing from Weakness

By James Kwak

President Obama’s 2015 budget proposes a number of tax increases that will mainly affect the rich. They include:

  • Limiting the tax savings on deductions to 28 percent of the deduction amount (and applying this limit to exclusions as well, such as the one for employer-provided health benefits)
  • Requiring a minimum 30% income tax on income less charitable contributions, which is intended to limit the benefit of tax preferences on capital gains and qualified dividends
  • Reducing the estate tax exemption from $5.34 million to $3.5 million and raising the estate tax rate from 40% to 45%
  • Eliminating tax preferences for retirement accounts once someone’s account balance is enough to fund a $200,000 annuity in retirement (simplifying slightly)

These are all good things, given the size of the projected national debt and the urgent needs elsewhere in society. But, of course, they have no chance of actually happening.

If President Obama really wanted these outcomes, there was a way to get them. He could have let the Bush tax cuts expire for good a year ago, making high taxes on the rich a reality. Then, a year later, he could have proposed a middle-class tax cut and dared the Republicans to block it in an election year. (He could also have traded a reduction in the top marginal rate—from the 39.6% that would have resulted, not counting the 3.8% Medicare tax—for the reforms he is now proposing.)

But no. Instead, he locked in low marginal rates, including low rates on dividends, that cannot be budged so long as Republicans have 41 votes in the Senate. And today he’s left waving a “roadmap” that has no chance of becoming reality.

7 responses to “Posturing from Weakness

  1. Kind of makes one wonder about the fiscal responsibility of having all those budget books printed if the Obama budget was, in fact, DOA from the get-go. Next year, we can all download budget PDFs instead! But seriously, interesting point about the lost opportunity of allowing the Bush tax cuts to expire once and for all. Seemed at the time to be a defensive move to keep “the middle class” (and, really, the politically important upper middle class) in the Democratic fold. So, the fiscal impasse continues. Substantive reform gets that much harder to initiate as more time passes and taxpayers assume Bush era tax rates will go on forever. We’re probably already there. At the same time, absent broad based jobs and income growth, there will be fewer and fewer taxpayers in preferred categories and therefore less and less political resistance to substantively (and not just symbolically) redistributive policies. It will be interesting — and potentially painful — watching this play out.

  2. Even though it will never happen, we still find out who the problem is by how loudly their wallet speaks against it.

  3. Yea, it should be politically painful to observe this play out.

  4. amiltonJohn H

    Another great and instructive posting, James. Thanks.

    John

  5. “If President Obama really wanted these outcomes, there was a way to get them. He could have let the Bush tax cuts expire for good a year ago, making high taxes on the rich a reality……Instead, he locked in low marginal rates, including low rates on dividends, that cannot be budged so long as Republicans have 41 votes in the Senate. And today he’s left waving a “roadmap” that has no chance of becoming reality.”

    In other words: he really didn’t want these outcomes. In other words, he successfully blocked re-instituting higher taxes on the wealthy while creating the illusion he is for them. In other words, he performed exactly as his handlers directed him to.

  6. “But seriously, interesting point about the lost opportunity of allowing the Bush tax cuts to expire once and for all. Seemed at the time to be a defensive move to keep “the middle class” (and, really, the politically important upper middle class) in the Democratic fold.”

    Seemed at the time to me like he was pandering to the 1%ers. Since when has Obama done ANYTHING the Middle Class can point to and say ” See there, he has our back?” Since never.

  7. "Know Your Banker"