The Washington PostDemocracy Dies in Darkness

Instead of fixing the tax system, Obama returns to campaign mode

This is what the permanent campaign looks like. (Bill O’Leary / The Washington Post)

President Obama proposed a number of changes to the tax code in his State of the Union address. Some of them, if enacted, would represent improvements to the status quo. But taken as a whole the president’s tax proposal is quite bad. And it suggests that the president isn’t interested in compromise or working with Republicans in Congress on tax reform.

Let’s start with the good. The president wants to expand the earned income tax credit (EITC) for workers without children. The EITC is a federal earnings subsidy for low-income, working households. The logic is simple: If you work and don’t earn a lot of money, the government will write you a check to supplement your earnings. For example, in 2014, a married couple with two children that earned $20,000 would receive a $5,460 EITC subsidy.

The EITC’s current structure is much more generous to households with children than those without. The maximum EITC subsidy available to a single worker with three children is $6,143. The most a worker with no kids can get is $496.

Many of those workers without children are men, and prime-aged male workforce participation has been falling for decades and took a hit in the Great Recession. The president wants to double the childless EITC, which I fully support. History suggests that such an expansion will draw single men without children into the workforce, and will reduce poverty. Conservatives, who support earned success and the goal that no one who works full time and heads a household should live in poverty, should support the president’s proposal.

The president also wants to expand access to employer-based retirement savings vehicles. Many firms would be required to automatically enroll their employees in an individual retirement account (IRA) plan if they don’t already offer retirement plans of their own. Tax credits would be offered to many firms to mitigate the administrative burden of compliance.

A stock of savings is good for individuals for the obvious reasons, and is a key driver of tomorrow’s economic growth and of increased standards of living for our children and grandchildren. The president is right to nudge Americans to save more.

The president would also close the “stepped-up basis loophole.” This is a technical provision, but the gist of it is that a capital gain accrued during a person’s lifetime that is left to his heir at the time of his death is not subject to capital income tax. The exclusion of these capital gains from taxation cost the taxpayer $43 billion in 2013. That’s real money, and the president is right to close this loophole. (Though I wish he’d use the closure to lower tax rates; more on that later.)

Despite these positive elements, the president’s tax proposals are, on balance, quite bad. The president wants to increase the tax rate on capital gains and dividends to 28 percent. This is a step in the wrong direction. The president’s plan to automatically enroll some employees in IRAs suggests he understands that savings are vital to the economy as a whole and to the well-being of individual Americans, so it is odd that he would simultaneously discourage savings by increasing the tax rate on capital income.

And the president is wrong to argue that we’ve returned capital income tax rates to their glory days under President Ronald Reagan. As my AEI colleague Alan D. Viard has explained, capital income taxes exist today that didn’t during the Reagan administration (the unearned income Medicare contribution, for example), and that would push the top rate above 28 percent if the president’s proposal was enacted. Having said that, you do have to admire the White House’s communications shop for this piece of political rhetoric.

The president wants to dramatically increase the tax credit for child care expenses. I worry about the government dumping money into the child-care industry — we’ve seen this movie before with health care and higher education. Why not simply expand the child tax credit (CTC), and allow families to decide whether they want to spend their extra CTC dollars on child-care expenses?

I sympathize with the president’s desire to discourage excessive risk taking in the financial sector, but disagree with the technocratic micromanagement present in the president’s proposal to impose a seven basis point fee on the liabilities of the largest financial firms (around 100). Perhaps a tax on leverage ratios that applies to all firms in all industries? Do we really think if Wal-Mart — a non-financial firm — were in deep trouble because of excessive risk taking that Washington wouldn’t rush to bail it out, too? I don’t know for sure what’s best, but a liabilities tax that applies to 100 firms in one industry ain’t it.

The worst part of the plan is what’s missing from it. For months and months Washington’s corridors — powerful and not — have been buzzing with talk of real corporate tax reform. This was one of the three things — along with trade authority and infrastructure — that the president and Congress could get done. We have been told over and over again that the president will work with congressional Republicans.

Tax reform is understood to mean broadening the tax base while lowering tax rates. In his plan, the president broadens the tax base, but doesn’t lower any tax rates. In fact, he raises rates.

This isn’t tax reform; it’s a tax increase. And it’s a tax increase on, of all things, savings — it’s a tax increase on a key driver of future economic growth at a time when serious economists worry that future growth will be a whole lot slower than we’d like.

The plan is bad economics. And the political message is clear: The president is not interested in working with Republicans on taxes. His definition of compromise — I will work with Republicans when they agree with me and will not when they don’t — has always been lacking. But the absence of a corporate rate reduction and the presence of capital income rate increases suggests that even under his own definition the president isn’t interested in compromise.

Twenty-two months before Election Day, and the state of our union is election mode. A pity.