With President Obama back in Washington and Congress returning on Tuesday, the question is: When, or will, the fiscal cliff be avoided? Obviously, for the economy and consumer/business/investor confidence, the sooner the better.
On Friday, the Chicago Tribune, which endorsed President Obama for re-election, urged the President to take the suggestion made by the Committee for a Responsible Federal Congress:
“It offers three options for raising revenue from high earners without raising rates:
• Put a dollar cap on itemized deductions. If Obama insists on $1.6 trillion in new tax revenue, that would mean nearly eliminating those deductions for top earners. But by encouraging Americans to make their financial decisions based on what's sensible economically rather than on what a loophole-riddled tax code incentivizes, this improves tax policy.
• In a twist on the first option, Congress and Obama could limit the combined value of various deductions, credits and exclusions for high earners.
• Limit the value of certain deductions to the 28-percent bracket, and then phase out that value on a progressive basis as incomes rise. It was Obama who floated the first half of this scheme — limiting the value of deductions — in his budget proposal for the fiscal year that started Oct. 1. Phasing out that value until it drops to zero for incomes of $1 million or more would increase the IRS’ haul.”
As the Tribune indicated, President Obama would get what he wants, more taxes from the rich, and House Speaker Republican John Boehner has indicated he would support cutting deductions to get more revenue. And it could get done now, as opposed to December 31. It seems like a neat little solution. What could be wrong with it?
A couple of possibilities. First, the rich (i.e., those couples making over $250,000 per year and those individuals making over $200,000 per year*) would not be paying higher tax rates. They would be paying more in taxes, but the President campaigned on higher rates. Would merely having the rich pay more taxes be good enough or does he need to have them pay higher rates, too? Would he view this idea, i.e., getting more tax revenue by cutting deductions as opposed to raising rates, as giving in to the Republicans? In 2009 he told Eric Cantor that elections have consequences – and that he won. Does he need to have higher rates to confirm his victory?
Tied in with this, when then-Senator Obama suggested raising capital gains tax rates in an interview with Charlie Gibson in 2008, Mr. Gibson challenged him on the grounds that history shows increases in capital gains tax rates result in a decrease in the amount of revenues actually collected by the government. Senator Obama replied: "Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness."** I don’t know if anybody has ever followed up with President Obama to find out whether he really wants to have higher rates, even if they don’t produce more revenue, because he likes the fairness – and symbolism – of the higher rates. It is an interesting question and would be an interesting answer.
An unspoken reason why limiting deductions, versus raising rates, might not acceptable to at least some Democrats, goes to the deductions that would be limited. One of the biggest deductions is state taxes, including state income taxes. Being able to deduct state income taxes from your income before calculating the amount of federal income tax you owe, makes state income taxes a little less painful. And it makes a higher state income tax rate a little less objectionable. Limiting federal income tax deductions could mean that some people wouldn’t be able to effectively deduct all of the state income taxes they pay. This would obviously be a particular problem in states with higher state income taxes, like California and New York and many other Democratic states. It would be less of a problem in states like Texas, which don’t have a state income tax. In other words, while Democrats probably would not admit it, limiting deductions might not be as good for “their” rich people as for the other party’s rich people.
So, there is a solution in front of President Obama that would get the rich to pay more in taxes, but it wouldn’t raise the tax rates and it might hurt rich people in states with high state income taxes (i.e., states that tend to be Democratic) more than rich people in states with lower state income taxes.
It will be interesting to see what the President – and his party in Congress – do.
---------
* I wonder if President Obama’s higher rates for the rich would be linked to inflation. They certainly haven’t been in his campaign proposals. They are still at the same level they were four-plus years ago.
** The Wall Street Journal, August 19, 2008 (also here).
UPDATE (11/24/12 10:47 pm): Fixed a formatting mistak; (11/24/12 10:58 pm): Fixed a really egregious grammatical error in the last sentence.
Comments