The Obama Administration recently released its budget for fiscal year 2016, which begins October 1st. Combined with the State of the Union address in January, I think we now have a fairly good idea of the president’s priorities and the direction the general debate on the economy will take in the coming months. With Republicans now controlling both chambers of Congress, the chances that Obama’s budget and State of the Union proposals will be enacted in their current forms are nil. These ideas are as much political as they are economic, and Obama is using this opportunity to frame the political debate for the upcoming year and 2016 presidential election. Still, I think there are some important ideas to glean from all of this, particularly as they relate to tax policy:
Individual Taxes
The Administration is proposing a series of tax cuts and spending programs aimed at working families which would be largely paid for by raising taxes on the rich. This agenda is being marketed, as it was in the State of the Union, under the banner of “middle-class economics.” To accomplish his goals, Obama is proposing the following:
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Reform the taxation of capital income to increase the share of taxes paid by the wealthiest as well as impose financial fees.
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Provide a new, simple tax credit to two-earner families.
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Streamline child care tax incentives to give middle-class families with young children a tax cut of up to $3,000 per child.
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Simplify and target education tax benefits (e.g. Pell Grants) to improve college affordability. Note: Obama has backed away from his State of the Union proposal to limit the tax benefits of 529 college savings plans. Two years of community college would still be free under his plan, but the funds would come from general tax revenue.
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Provide incentives to workers to simplify and automatically save for retirement.
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Raise additional revenue by increasing taxes on the wealthiest, in part by limiting certain tax expenditures for the most affluent by capping their value at 28 percent. The administration is again calling for implementation of the so-called “Buffett Rule” by imposing a new “fair share tax”.
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End tax breaks that allow professional services businesses to avoid self-employment payroll taxes.
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Restore the estate, gift and Generation-Skipping Transfer tax parameters that were in effect in 2009. The budget would also modify the transfer tax rules for Grantor Retained Annuity Trusts and other grantor trusts.
Business Taxes
Obama is proposing both international and domestic business tax reform including:
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19% minimum tax of foreign income, along with a 14% one-time tax on previously untaxed foreign income that is housed abroad.
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Limit the ability of domestic entities to move overseas by using tax strategies such as inversions.
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Establish tax incentives for locating jobs and business activity in the U.S.
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Restrict the use of hybrid arrangements that create stateless income.
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Expand and permanently extend increased expensing and simplified accounting for small businesses.
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Eliminate capital gains taxation on investments in small business stock.
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Increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures.
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Expand and simplify the tax credit provided to small employers for non-elective contributions to employee health insurance.
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Encourage manufacturing, research, clean energy, and job creation by enhancing and making permanent research incentives and extending and modifying certain employment tax credits like hiring veterans. The administration also proposed modifying the permanently extending the renewable electricity production tax credit and the investment tax credit, as well as provide a carbon dioxide investment and sequestration tax credit.
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To encourage regional growth, the budget proposes to modify and permanently extend the New Markets Tax Credit and reform and expand the Low-Income Housing Tax Credit.
In adopting an economic agenda that is explicitly redistributive, the White House is seeking to tackle the glaring problems of wage stagnation and rising inequality, while also daring Republicans to oppose some measures that are likely to be popular. Considered on their own merits, many of these policy proposals are well targeted and worthwhile. But Obama’s assertion they will make a big dent in inequality and wage stagnation is impossible. For the broad middle class—households situated between the twentieth percentile and the eightieth percentile of the income distribution—the measures, taken together, would raise after-tax incomes by just 0.1 per cent, or even less, according to the Tax Policy Center. (Households in the bottom quintile would see their after-tax incomes rise by one per cent. Households in the top quintile would see their after-tax incomes fall by 0.7 per cent.) Obama’s plan also fails to truly balance the budget. The White House is aiming to stabilize the deficit at about 2.5% of GDP, which is not far from what it is now. It barely needs saying that there is no prospect of Congress, now firmly in Republican grip, going along with these ideas. More than anything, Obama is setting the stage for upcoming tax debates as they relate to the 2016 election, and speaking to an American public eager to see economic prosperity more widely shared. Expect more fighting than solutions in the days to come.
