Obama and Buffett Rule Make ¡®Good Tax Politics, Not Good Tax Policy,¡¯ Expert Says

President Barack Obama delivering the State of the Union address on Tuesday night. (Photo: AP)

A central focus of President Barack Obama’s State of the Union address Tuesday night was economic fairness, and requiring the wealthiest of Americans to pay more in taxes, but tax specialists and wealth managers say hiking taxes for the rich will do nothing to fix the tax code–which they say is a mess.
Obama’s proposal to cut $3.6 trillion from the deficit over the next decade through a measure called the Buffett rule, named for billionaire investor Warren Buffett, which increases taxes on wealthy Americans who earn $1 million or more per taxable year, is merely “good tax politics, not good tax policy,” says Christopher Bergin, president of Tax Analysts.
The fundamental problem with the tax code, Bergin says, is that “our tax system right now picks winners and losers.” The wages that average workers pay and are reported on their W-2s are taxed “differently” than the money Buffett and Mitt Romney, the current GOP presidential candidate, make, which is “not by working but by moving money around.” The way the law is written, Buffett and Romney “get a better tax rate than the rest of us.”
As Obama said during his speech on Tuesday, “Tax reform should follow the Buffett rule. If you make more than $1 million a year, you should not pay less than 30% in taxes.… Washington should stop subsidizing millionaires. In fact, if you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions.” On the other hand, he said, “if you make under $250,000 a year, like 98% of American families, your taxes shouldn’t go up. You’re the ones struggling with rising costs and stagnant wages. You’re the ones who need relief.”
But “sticking it to the rich” will not fix the income tax code, “which is extremely problematic,” Bergin says. The tax system as it stands now “benefits the rich, and the poor–however you want to categorize them–lower income people do not pay federal income taxes. Some of them get refundable earned income tax credits for some of the payroll taxes they pay.” But it is the middle income folks–those generally earning $100,000 to $500,000 per year, Bergin says, that “really get hit; and are paying more of an effective [tax] rate than Romney.”
Obama also said he wants to let the Bush tax cuts expire. “When it comes to the deficit, we’ve already agreed to more than $2 trillion in cuts and savings. But we need to do more, and that means making choices,” Obama said. “Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2% of Americans. Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. Right now, Warren Buffett pays a lower tax rate than his secretary.”
Asked Obama: “Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else–like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both.”

Obama went on to say that America needs “to change our tax code so that people like me, and an awful lot of members of Congress, pay our fair share of taxes.”
But Bergin doubts Congress will make any headway in reforming the tax code this year. Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, and “his colleagues have to deal with things that are timed to blow up this year or have already blown up last year; there is no opportunity for tax reform this year.”
Lawmakers must grapple this year with the Alternative Minimum Tax, as the patch instituted last year has expired, as well as the estate tax. Bergin says he’s been hearing from wealth managers “who don’t know how to advise their clients” because the estate tax rules revert back to 2001 rates at the end of 2012.
Then there’s the payroll tax cut, which was extended for two-months before Congress’ holiday recess and that expires on Feb. 29. The Temporary Payroll Tax Cut Continuation Act of 2011 extends the two-percentage-point payroll tax cut for employees, continuing the reduction of the Social Security tax withholding rate from 6.2% to 4.2%.
Obama urged Congress during his speech to pass the payroll tax cut “without delay.” He said Congress’ “most immediate priority is stopping a tax hike on 160 million working Americans while the recovery is still fragile.”
Bergin says there’s a danger for Social Security if Congress continues to “extend” the payroll tax cut as opposed to a long-term solution. “If [Congress] keeps extending this payroll tax cut there’s a threat to Social Security that no one is talking about, of it not becoming a separate system but just another budget item” for Congress.

The Reorganization Man - the government we have is not the government we need

The Washington rap on President Obama is that he's humorless, but that's unfair. He may not be Jay Leno funny, but his bit Friday on reforming and reducing government was great.
There he was in the East Room, explaining that "the government we have is not the government we need." That's for sure, and Mr. Obama even added the Gingrichian theme that "We live in a 21st-century economy, but we've still got a government organized for the 20th century. Our economy has fundamentally changed—as has the world—but our government, our agencies, has not."

President Obama delivers remarks on reforming the size of the federal government at the White House on Friday.

Alas, the President wasn't talking about modernizing Medicare or the entitlement state. He merely wants Congress to give him more power to reorganize the government. He says he wants his team to scrub down the executive branch looking for waste, duplication and bureaucratic complexity, and then to fast-track their proposals to Congress for an up-or-down vote within 90 days.
Mr. Obama's first targets for such "consolidation authority" are the six agencies related to business and the world economy, from the Commerce Department to the Export-Import Bank to the U.S. Trade Represen! tative. Maybe the White House chose to start there because, with an eye on the GOP campaign, Rick Perry wants to eliminate Commerce and a few other cabinet departments he can't remember.
Another way of putting it is that this new emphasis on streamlining the bureaucracy is Mr. Obama's version of the Texas Governor's "Oops." Having presided over the largest expansion of government since LBJ—health care, financial reregulation, spending 24% of GDP, the surge of industrial policy—Mr. Obama's pollsters must be saying that voters have the jimmy-legs about bigger government and that he thus can't run only as a Great Society man.

Enlarge Image

Close

But let's go to the videotape. One measure of government size is the federal work force, measured by the White House budget office as civilian full-time equivalent employees, excluding the military and Post Office. The executive branch had about 1.875 million workers in 2008 when the financial crisis hit, a number that held relatively constant throughout the post-9/11 Bush Administration. That number climbed to 2.128 million two years later under the 111th Congress—or growth of 13.5%. That's the largest government since 1992, when the Clinton Administration began to slash defense! spendin g.
This jobs boom is projected to decline slightly this year, to 2.116 million public employees, and the Administration says the Commerce unwind will take it down by another 1,000 or so. Yet even that would come through attrition, which usually means the competent people leave when they've had it with the lifers.
Proposals for government reorganization are the elevator music of politics, always present but never leaving much of an impression. Newt Gingrich says he's running in part to apply Lean Six Sigma best practices to the bureaucracy. Al Gore famously drew up a scheme for "reinventing government" in the late 1990s. He abandoned it after the airline unions revolted amid his attempt to reinvent the Federal Aviation Administration.

Joe Rago on President Obama's proposal to merge agencies within the Commerce Department.

Reshuffling agencies rarely works because what's important in government isn't where the bureaucrats sit but their mindset. The incentives are for inertia, turf protection and blame-shifting—unless change is imposed from the top. Mr. Obama has made it clear with his priorities over three years that his preference is for the government status quo, only more of it.
But Mr. Obama is now at least bowing to the principle of smaller government, and our advice to Congress is to weigh his proposals and extract some concessions to see if the President means what he says.
A major concern is the office of the U.S. trade rep, which Mr. Obama wants to subsume within the Commerce monolith. But the trade rep office is one of the best in government precisely because it is small, reports to the White House, and is focused on the single mission of trade expansion. As part of Commerce it may be drowned out by protectionist voices.
Another priority ought! to be r eforming the 47 separate job retraining programs, all but three of which overlap. The Government Accountability Office calls this wasteful with "no measurable benefit," but the White House has rebuffed any meaningful change.
This is a President who last year promised a review of all regulations while riding the greatest rule-making wave in American history. Now he's calling for leaner government without mentioning ObamaCare and Dodd-Frank, which create so many new boards and commissions that government auditors (literally) can't even count them. We suspect many in the White House were laughing themselves when they came up with this one.