In principle, I am in great sympathy with the White House's turn towards a stance of treating high-end wealth concentration as an important tax policy concern. But, like many commentators across the political spectrum, I am less than thrilled by what I know of the details of the White House plan that featured in the State of the Union speech.
Called the "Blueprint for an America Built to Last," it is available here. I guess that label must have beaten out "Making America Ford-Tough" in the focus group sessions. But let's go beyond snark to substance by covering most of the main tax suggestions (they are not quite yet at this stage proposals) in the document.
1. Buffett Rule - The White House favors "measures to ensure that everyone making over a million dollars a year pays ... at least 30%." But apparently this doesn't apply to people who make large charitable contributions to get below 30%.
The purist in me says that this is the wrong way to go about making our system more progressive, although I favor that end. When you start talking about what tax rates people pay, you get into all sorts of side issues that aren’t really of central interest.
The policy is based on a fraction, taxes paid over some measure of income. But for starters, what should be in the numerator? As per the WSJ column yesterday by Berlau and Kovacs that I commented on here, do we need to argue about the case for counting corporate taxes that one arguably indirectly paid as a shareholder? If so, do we have to try to measure them (rather than, like Berlau and Kovacs, conclusively adopting the false presumption that corporations actually pay tax at 35% on their economic income)?
And what should be in the denominator? Is it just adjusted gross income (AGI), which is taxable income prior to taking itemized deductions and personal exemptions? Suppose a hedge fund guy reports AGI of zero, because he wiped out the capital gain from his carried interest by harvesting tax losses through selective realization of the loss assets in his portfolio. Does Congress, as proved so wildly unsuccessful with the alternative minimum tax, need to enact a parallel tax base that is ostensibly broader but then will inevitably be targeted by interest groups for repeated narrowing?
Are we going to get multiple tax return computations - maybe this plus regular taxable income plus the existing alternative minimum tax - and create silly tax planning incentives for taxpayers to try to equalize their tax liability under each, while also having to maintain multiple tax attributes (such as basis) for each asset, one for each system?
OK, I realize that this is politically salient, and the best shouldn't be the enemy of the good, but without more I'm not even sure how good this is (again, despite favoring the goal of increasing high-end income tax liability).
2. Eliminate tax deductions for those making more than $1 million - This is listed aa separate item, and the items they mention (not all of which actually involve deductions, as distinct from exclusions) are housing, healthcare, retirement, and childcare. The last of these is pretty trivial in this income range. Retirement saving tax benefits are a big and complicated topic, and I'm not entirely sure what they have in mind. Phasing out home mortgage interest deductions and the exclusion for employer-provided healthcare at the high end has potential appeal, especially since these are bad items in a tax policy sense but are both politically sacrosanct and would be a bit economically disruptive to yank away for everyone else cold turkey. Again, one needs more details to really assess this.
3. Extend the payroll tax cut - Though this is far from the best stimulus design (since it is largest for people who are earning at least $110,000, and thus have less marginal propensity to spend an extra dollar than poorer individuals), it does appear to be the best and indeed only one that might currently be available from Congress.
4. Expanded "tax relief" for start-ups and small businesses - Yawn, sigh, groan.
5. Remove tax incentives to locate overseas through an international minimum tax - I suppose the idea is as follows. Compute global taxable income for U.S.-headed multinationals, meaning that we count all of the income of their controlled foreign subsidiaries that would be currently taxable in the U.S. if deferral were repealed. Unclear how foreign taxes play into this. Say the minimum global rate is 20%. I am guessing that the foreign taxes are treated as equivalent to U.S. taxes for this purpose - i.e., they are included in the numerator, taxes paid - but conceivably they might just be deductible (i.e., ignored in the numerator but deducted from the denominator, which is global taxable income).
In assessing provisions that would raise U.S. taxes on U.S. multinationals, I think it's helpful to break out 3 distinct issues:
First, at how high a level do we want to be taxing them, on their true foreign source income and/or as compared to non-U.S. multinationals on all of their global income? As I have discussed here, the correct tax "price" at this dimension is hard to determine, and depends in part on the value that both U.S. and foreign shareholders ascribe to U.S. rather than foreign incorporation. This includes a big transition component since existing U.S. companies are largely "trapped" here (subject to true purchases by foreign companies and keeping in mind that they need not be the ones to issue new equity).
Second, to what extent does the tax change target what we suspect of being disguised U.S. source income, classified as foreign source for tax purposes because the rules are so manipulable? I suppose there is a "proxy" argument here for firms with a significant U.S. presence - i.e., that if they are paying a low global rate that may well involve income-shifting outside of the U.S. tax base.
Third, how does the tax change affect the two awful rules that currently dominate U.S. taxation of outbound investment? These are deferral and the foreign tax credit. I have discussed how bad these rules are elsewhere, and I would distinguish this issue from whether one wants the tax rate on outbound to be low and high. After all, both a pure worldwide system under which foreign taxes are merely deductible, and an exemption system for foreign source income, eliminate both. The rule that the Administration suggests would make deferral less important (since a U.S. company faces some current U.S. tax even if it keeps its money abroad), but its effect on the foreign tax credits depends on whether it treats them as equivalent to U.S. taxes paid.
Here's my suggestion: issue the proposal with a fairly low rate but with foreign taxes merely being deductible. E.g., say we have a 5% or 10% minimum worldwide rate, in the above sense, with foreign taxes merely being deductible for this purpose.
6. Lower tax rates for companies that manufacture and create jobs in the U.S. - More specifically, lower tax rates for U.S. manufacturing, double the tax deduction for high-tech manufacturers, provide a tax credit for companies' "moving expenses" (that's what it says) when they "close production overseas and bring jobs back to the United States." This, I must say, sounds really stupid on all fronts.