I (and many others) have noted, the Obama Administration’s budget for the 2016 fiscal year is essentially a wish list, which has no chance of being enacted in anything like its present form. But that doesn’t mean that it lacks import. In advance of the 2016 Presidential campaign, this budget provides a valuable blueprint for what a moderately progressive economic agenda would look like. And equally, or perhaps more importantly, it demonstrates what a travesty the U.S. tax code is, and how badly it needs overhauling.
Traditionally, tax reform is a cause of the right. That’s largely because corporations and rich people follow the details of taxation closely—or, rather, they hire lobbyists to follow it for them. But what the Obama Administration has grasped, and what its budget proposals reflect, is that changing the tax code, and stripping it of some (or all) the favors it bestows on the wealthy and well connected, should be a great rallying cry for liberals, progressives, and anybody else who takes seriously the notion of equal treatment under the law.
Reading budget documents line by line, which is what I did last night, isn’t the most exciting activity. But it gets you down to the level of detail where the loopholes, the scams, and the lobbyists live. Take Table S-9 in the numbers section, which details how each one of the Administration’s many proposals would affect the deficit over the next ten years. It’s a dry and lengthy set of figures, but also a revealing one.
In a section of the table headed “Loophole closers,” we learn that taxing the profits earned by hedge funds and private-equity firms as ordinary income would raise more than two billion dollars a year between 2017 and 2021. At the moment, and for reasons that don’t withstand any serious scrutiny, these firms are allowed to categorize much of the profit they generate as “carried interest,” which is taxed at a reduced rate of twenty per cent.
Now, in a four-trillion-dollar budget, two billion dollars doesn’t seem like a huge amount. But most of the profits that hedge funds and private-equity firms generate are concentrated in a few dozen partnerships, which benefit greatly from the giveaway. For example, it was by taking advantage of this loophole that Mitt Romney, formerly of Bain Capital, was able to pay just fourteen per cent of his 2011 income in federal taxes. If Bain’s profits had been treated as regular income, which in 2011 was taxed at rates of up to thirty-five per cent, Romney’s tax bill would have been much higher.
Moving up a bit in the table, there is an entry titled “Reforms to capital gains taxation, upper-income tax benefits, and the taxation of financial institutions.” The first proposal—reforming the capital-gains tax—is actually two reforms together. The first would raise the rate that high earners pay on capital gains and dividends, from 23.8 per cent to twenty-eight per cent, which is the rate they paid during the soak-the-rich Reagan Administration.* The other reform would eliminate a loophole in the estate tax that allows heirs to reduce their tax bills. Known in the industry as the “stepped up basis” loophole, it allows the beneficiaries of estates to estimate the cost basis of their inheritances at current market prices, rather than the prices that were paid for them, often years earlier. Since the value of most investments rises over the years, this loophole can make a huge difference to tax-liability calculations. Eliminating the practice would have a big effect on some inheritances. But since the vast majority of estates fall below the threshold for federal inheritance taxes—$5.4 million in 2015—it would mainly impact the top one per cent, which owns forty per cent of the nation’s wealth.
Over ten years, these two reforms would raise more than two hundred billion dollars in new tax revenues. For the sake of comparison, that would be more than enough to cover an annual five-hundred-dollar tax credit for second earners, an expansion of the earned-income tax credit to low-paid workers who don’t have children, and more generous tax credits for parents who pay for child care—all proposals contained elsewhere in the budget.
The budget would also address another way in which wealthy people reduce their tax bills, which is by employing crafty accountants and taking deductions for things like mortgage interest, state taxes, charitable donations, and Cadillac health-care plans. One of the budget proposals that hasn’t received much attention would place limits on the total amount of deductions than can be taken by individuals earning more than two hundred thousand dollars a year and couples earning more than two hundred and fifty thousand dollars. To most ordinary people, taking deductions is a way of saving a few bucks. But for the very rich the sums involved are enormous. Once again, Table S-9 tells the tale. In placing limits on deductions for high earners, the budget would raise more than six hundred billion dollars over ten years. That’s more than enough to pay for all of the tax breaks contained in the budget that are aimed at the middle class. In fact, it would pay for them twice, with about fifty billion dollars left over.
I could go on, addressing the whole issue of corporate loopholes. The picture should already be clear, though. After decades of money politics and anti-tax ideology, the U.S. tax code is festooned with giveaways to the rich and powerful. In seeking to eliminate some of these blights straight away, the 2016 budget seems destined to fail. But in highlighting some of what’s wrong, and showing how it could be remediated, the budget will help to shape the political agenda for years to come. And that makes putting it out a very worthwhile exercise.
