Obama's Misguided Thinking on Tax Reform

The president doesn't understand that we can't afford 'fiscal cliff,' 'taxmageddon' tax hikes

July 19, 2012 RSS Feed Print

Recently, President Obama called for an immediate extension of the Bush tax rates, which have been in place for a decade—but only for anyone earning less than $250,000. He said people just want to know if their taxes will go up next year: "Middle-class families and small business owners, they deserve that guarantee. They deserve that certainty. It will be good for the economy and it will be good for you." But the president didn't mention that his proposal extends current rates on the middle class for only one year, until after the election. If he really wanted certainty, he'd have proposed more than a one-year extension, and he would have covered all taxpayers.

[See a collection of political cartoons on the economy.]

If he really, really wanted certainty that would be "good for the economy," he would do something now about the economic nightmare we're facing by year's end. Instead he proposed this: "And then next year, once the election is over, things have calmed down a little bit, based on what the American people have said and how they've spoken during that election, we'll be in a good position to decide how to reform our entire tax code in a simple way that lowers rates and helps our economy grow, and brings down our deficit—because that's something that we're going to have to do for the long term," he told the East Room audience.

That's news. The president has promised to enact long-term tax reform, something he's never done. Granted, he doesn't have much of a choice; $600 billion in new tax increases and spending cuts are looming immediately after the election, when the government will once again be hitting the debt ceiling. Some call it the "fiscal cliff." Others, "taxmageddon." Whatever you call it, it's going to be a disaster.

The Congressional Budget Office has already projected that allowing those tax hikes and spending cuts to take effect in early 2013 "would throw the economy back into recession—and that's before factoring in the uncertainty about the debt ceiling," according to the Washington Post. If businesses and investors start getting nervous because of all the unpredictability, we'll see more layoffs, less investment, and lower consumer confidence this fall. Nobody needs that.

In his remarks, the president pointed out that so far, he's "cut taxes for small business owners 18 times." What he also didn't mention is that many of those "tax cuts" were actually short-term tax credits, some good only in 2011 and 2012. One so-called tax cut under the Small Business Jobs Act simplifies the rules for small business deductions of cellphone bills. You get the idea. His 18 "tax cuts" are small, complicated, and temporary. The tax reform we need is big, clear, and permanent. Too bad the president has chosen to wait while the uncertainty builds.

Mitt Romney has an opportunity here. He should call for sweeping tax reform now, before the election: replace individual tax brackets with just three, at 8, 14, and 23 percent; drastically lower the corporate tax rate from 35 percent to 26 percent; and eliminate all loopholes as well as special rates for capital gains and dividends. Those are the proposals of the president's own Simpson-Bowles deficit reduction commission. The president has ignored them. Romney should not. Here's his chance to offer ideas that are big, clear, and permanent.

On his multi-state bus tour of the Midwest, the president often summarized the Republican vision for the economy as twofold: first, "we're going to give $5 trillion of new tax cuts on top of the Bush tax cuts, most of them going to the wealthiest Americans," and second, "let's eliminate regulations." "I'm not making this up," he told a rally in Poland, Ohio. "Their basic idea is if everybody is just on their own, doing what they do, everything is going to turn out just fine."

[See a collection of political cartoons on the 2012 campaign.]

So he's calling keeping the current rates in place for all Americans new tax cuts for the wealthy, when in reality he's proposing to raise rates on top earners; and he disagrees with Republicans, who say that we need fewer government regulations, not more. He doesn't seem to understand that yes, most Americans actually do like to be on their own, "doing what they do," without too much overregulation from the government. To most Americans, that's as basic as life, liberty, and the pursuit of happiness.

The president described the American Dream in a recent campaign speech as "that basic idea, that basic bargain that says here we all deserve a fair shot, and everybody should do their fair share and everybody should play by the same set of rules—that basic bargain that says, if you're willing to work hard and take responsibility in your own life, then you can find a job that pays a living wage and you can save up and buy a home and you won't go bankrupt if you get sick."

[Check out our editorial cartoons on President Obama.]

He started out well enough with the notion of equality of opportunity, that very American idea of everybody getting the same "fair shot" in life as everybody else. But then he veered left, called for higher taxes ("fair share") and pay equity ("living wage"), and ended up completely off the tracks, saying that protection from bankruptcy due to healthcare costs should be part of the "basic bargain" of being an American. The difference between the two philosophies couldn't be much starker.

These days the president also likes to talk about how he's "betting" on American workers, on American car companies, on clean energy. Now he's making an even bigger bet: He's betting that American voters will see these two vastly different visions of our future and choose the one that goes with fairness over growth, uncertainty over confidence, and more government over less.

If I were Mitt Romney, I'd take that bet.