The Obama administration released its FY 2013 budget proposal today. Obama projects that the deficit will be cut by over $4 trillion over the next decade, coming within the goalpost of 3% of GDP by the end of the decade. That includes a reduction in defense spending of almost $500 billion over the decade. At the same time, Obama makes the case for continuing the nation's investment in non-defense research & development--including clean energy.
The President's message (part of the budget document, see link at bottom) sets the theme of attention to the way the gains of the top 1% have coincided with aggravated problems for the majority of hard working Americans. It notices, that is that budgetary and tax policies, combined with deregulation and financial crisis, are moving ordinary Americans towards despair and out of the middle class.
By giving every American a fair shot, asking everyone to do their fair share, and ensuring that everyone played by the same rules, we built the great American middle class and made our country a model for the world. Today, ... for many Americans, the basic bargain at the heart of the American Dream has eroded.
Long before this recession hit, there was a widespread feeling that hard work had stopped paying off; that fewer and fewer of those who contributed to the success of our economy actually benefited from that success. Those at the very top grew wealthier while everyone else struggled with paychecks that did not keep up with the rising cost of everything from college tuition to groceries. And as a result, too many families found themselves taking on more and more debt just to keep up—often papered over by mounting credit card bills and home equity loans.
Then, in the middle of 2008, the house of cards collapsed. ... Banks had packaged too many risky loans into securities and then sold them to investors who were misled or misinformed about the risks involved. Huge bets had been made and huge bonuses had been paid out with other people’s money. ... [M]illions of hardworking Americans lost their jobs, their homes, and their basic economic security. ...
We built this Budget around the idea that our country has always done best when everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules. It rejects the “you’re on your own” economics that have led to a widening gap between the richest and poorest Americans that undermines both our belief in equal opportunity and the engine of our economic growth.
The President's message also points out something important for citizens to bear in mind as the elections hurtle towards us at the end of this year--the reason for the financial crisis and the huge deficits we face now relate to the irresponsible tax cuts of the Bush administration--all passed when everyone knew that they would result in significant deficits that would be hard to ever make up--and the military buildup underway since Reagan, in particular the huge costs of two preemptive wars undertaken by that administration.
When I took office 3 years ago, my Administration was left an annual deficit of $1.3 trillion, or 9.2 percent of GDP, and a projected 10-year deficit of more than $8 trillion. These deficits were the result of a previous 8 years of undertaking initiatives, but not paying for them—especially two large tax cuts and a new Medicare prescription drug benefit—as well as the financial crisis and recession that made the fiscal situation worse as revenue decreased and automatic Government outlays increased to counter the downturn.
The budget proposes a number of good changes.
- Obama proposes ending "special tax breaks" for Big Oil;
- Obama wants to finally end the "carried interest" fiasco, whereby equity fund partners that make much of their money by purchasing companies, overleveraging them to pay out debt proceeds to partners, and then breaking them up and firing workers are allowed under current interpretation of the partnership rules to treat their compensation income as capital gains if that is what the partnership they are servicing has.
- Obama proposes enacting a Buffet Rule (a type of alternative minimum tax requirement that millionaires pay at a rate at least equal to the middle class--the sentence presenting this in the President's message is badly botched);
- Obama wants to limit certain deductions for high income taxpayers to 28%: various deductions were subject to phaseouts at higher incomes before the Bush tax cuts but were phased out under those cuts.
- Another good change relates to the various temporary tax provisions enacted in the Bush administration that are a significant cause of the country's current deficits. Obama recommends allowing the temporary Bush capital gains rate decrease (from 20% to 15%) to expire as scheduled for high income taxpayers, and allowing the dividend treatment as a net capital gain, instituted first as a temporary measure in 2003 and extended several times so that it currently is set to expire at the end of this year, to expire as scheduled for high income taxpayers. The result would be that the unearned income from dividends would once more be taxed at the same rate as earned income from wages, a circumstance which many provisions of the corporate tax in Subchapter C--those designed to prevent schemes that "bailout" of corporate earnings at capital gains rates rather than the expected ordinary income rates--presuppose as basic to the corporate income tax (see, e.g., the section 302 redemption analysis that considers whether the redemption is a sufficient reduction to count as an exchange or rather should be taxed as a distribution under section 301).
We can expect that the proponents of corporatism--especially the corporate coalitions fighting for preserving the benefits for the mostly higher-income shareholders such as ALEC and the U.S. Chamber of Commerce--are prepared to raise a stink about this provision and will expect the GOP members in the House and Senate to vote with them. The obstructionist GOP is already holding a press conference and conference calls on the matter. See this C-SPAN item. This will be a test of whether Congress has been listening to the issues raised by the Occupy WallStreet movement across the country.
The arguments made by the corporate coalitions don't hold water. See various earlier posts on this matter at A Taxing Matter. Clearly, the dividend rates until 2003 didn't prevent people from investing or prevent people from making lots of money investing. Nor did the change in the dividend rate lead to corporations retaining more income in the US--instead, after getting one "tax holiday" in 2004, more corporations moved more money offshore in expectation of continuing the gravy train with future tax holidays. Anything the ALEC group says has to be taken with a very large grain of salt. Especially about how increasing the sum total of corporate and dividend taxation will drive people awy from investing and reduce corporate capital formation. The fact is that corporate taxation is at an extraordinary low and that most sales and purchases of corporate shares take place in the secondary market, putting no cash into corporations whatsoever!
But there's a good bit not to like as well. The President calls for "corporate tax reform"--a favorite agenda item of the radical right that will decimate any plans for reducing the deficit without overburdening the middle class if the GOP is able to move it forward. Obama suggests that corporate tax reform should close loopholes and lower rates so that it doesn't result in increased deficits. But any loophole closure will be undone shortly thereafter, and any lowering of rates will never be undone. It is folly to think that the kind of base broadening/rate lowering model applicable in 1986 could work in the "greed is good/taxes are bad" poisoned climate of 2012.
Office of Management and Budget FY2013 Budget Overview
White House Budget Proposal Text
President Discusses Budget Proposal (at Northern Virginia Community College) (with C-SPAN video)
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