What Obama's, Ryan's Tax Plans Are Really About

The debate over taxes and spending between Obama and Republicans has nothing to do with deficit reduction.

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David Shulman is a retired Wall Street executive who is now a senior economist at the UCLA Anderson Forecast. He is also affiliated with Baruch College (CUNY) and the University of Wisconsin.

In order to understand the current debate between President Obama and the Republicans in Congress you should understand that it has nothing to do with deficit reduction. If either party cared about deficit reduction, the proposals offered by the Simpson-Bowles commission would have already been adopted. Simply put the Democrats want to tax and spend more and the Republicans want to tax and spend less, but neither party has within them the courage to come up with the necessary combination of tax increases and spending cuts that over time would eliminate our current trillion dollar plus annual deficit.

President Obama's hawking of the "Buffett Rule", which would establish a 30 percent minimum tax on incomes over $1 million a year is a smoke screen. Using the Congressional Budget Office guidelines, which incorrectly assumes that all of the Bush era tax cuts and the Obama era payroll tax cut expire at the end of this year, over the next 10 years the Buffett Rule would raise $48 billion. Even if you use the more realistic baseline of current tax rates, the Buffett Rule would raise $160 billion over the next 10 years—more money, but hardly a game changer. Although that is far from chump change, it is more akin into spitting into an ocean of multi-year deficits.

[Read the U.S. News debate: Do the Rich Pay Their Fair Share in Taxes?]

So if it is not deficit reduction, why is President Obama promoting the rule? As he articulates it on the campaign trail, it is about "fairness". In his view it is simply unfair for a few high income people to realize an effective tax rate of 15 percent. Former Gov. Mitt Romney, the presumptive Republican nominee did precisely that in 2010 and 2011 on his $20 million plus income.  

However, the president fails to note that in 2009, the latest year available, nearly half of all tax filers did not pay any income tax at all and the top 1 percent of all taxpayers paid 37 percent of all of the income tax collected that year at an average rate of 24 percent. Thus most high income earners pay far more than what the campaign rhetoric would imply. He also fails to note that with the expiration of the Bush era tax cuts and the imposition of the new healthcare taxes the top rate on capital gains would increase from 15 percent to 23.8 percent and the top rate on dividends would rise from 15 percent to 43 percent. The low rates for capital gains and dividends are the primary reasons for high income earners reporting far less than what the maximum 35 percent marginal tax rate would imply. In essence the president's original proposal, which still stands, to do away with the Bush era tax cuts for taxpayers earning in excess of $250,000 a year would all but make the "Buffett Rule" superfluous.

[See a collection of political cartoons on the budget and deficit.]

On the Republican side, Rep. Paul Ryan wants to cut the top bracket to 25 percent and eliminate taxation on all capital income. He claims to make up for the lost revenue by doing away with a host of tax preferences that now exist in code, but he is not specific. If he were, there would be cries of anguish throughout the nation as the huge deductions for mortgage interest and charitable contributions and the taxation of employer paid healthcare benefits come into play. Of course lowering rates and reducing tax preferences is exactly what the Simpson-Bowles commission proposed, but their purpose was to raise revenue; Ryan's is not, at least not directly.

Ryan severely cuts spending for Medicare, Medicaid, and for most functions of government. However, his Medicare cuts take place well into the future and therefore hardly affects the near term budget outlook. And he does not touch Social Security. This last point is a sign that he too is not serious about deficit reduction and more serious about campaigning.

[Read the U.S. News debate: Will the New Ryan Budget Plan Hurt the GOP in 2012?]

Nevertheless, the Ryan Budget makes a perfect foil for the populist campaigning Obama. The president wants to raise taxes on the very wealthy, while Ryan wants to cut them. The president wants to spend on popular programs, while Ryan wants to cut them. The Republicans would have more credibility with their deficit reduction argument if they were more flexible on the revenue side. However, they are not,

To be sure, with unemployment still above 8 percent and economic growth running at a subpar 2 percent, it is hard to see how raising taxes on capital, which is exactly what President Obama is proposing, is going to increase employment. That might be able to be accomplished if it were part and parcel with a very credible deficit reduction package, but that, unfortunately, is not what either party is proposing.

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