Obama’s FY 2011 Budget

by Linda Beale

Obama’s FY 2011 Budget

The Obama Administration released its FY2011 Budget proposals today which assumes a substantial amount of tax cuts (making the 2001-2003 Bush cuts permanent for most Americans costs about $3.75 trillion over ten years) and some tax increases to cover important programs (about $1.9 trillion), resulting in a substantial net tax cut of almost $2 trillion over ten years. See press release and Green book.

The press release claims that the Administration’s plan covers “short-term tax incentives to create jobs and encourage business investment, …proposals to deliver tax relief to middle class families and small businesses, and its blueprint for restoring fiscal discipline and responsibility to our tax code.”

Personally, I think most of the tax cuts are stupid and will do very little to create jobs. Passing a law to permit modification of home mortgage loans in bankruptcy would do more than any item in the bill. And many of the famlies offered “tax relief” are not really middle class–they are the upper middle/lower upper class. They aren’t the ones the Administration should be focussing on. The best way we could help ordinary Americans is to get more people at the lower end spending more. That would let the businesses thrive that are threatened by the drop in spending as people face difficult times, and letting businesses thrive means creating new job opportunities. And the best way to do that would be to use the money wasted in these tax cuts on real programs to create jobs–public infrastructure and public education. And how can you claim that a bill that includes even more tax expenditures for businesses that have been proven not to work except that they give managers and owners more money to spend on themselves (or invest overseas) is a bill that “restores fiscal responsibility”. Nah. I don’t think so.

Naturally, the media are plugging this as a tax hike. See, e.g., Donmoyer, Obama Seeks $1.9 Trillion Tax Rise on Rich, Business, BusinessWeek (Feb. 1, 2010). The Donmoyer story starts out with “the Obama administration wants to increase tasxes on Americans earning more than $200,000 by almost $970 billion.” But of course that’s achieved by letting the law Congress passed in the Bush adminstration play out as the law was written to play out–eliminating the tax cuts which were described as “temporary” measures that were expected to stimulate the economy. Now, if tax cuts really worked as economic stimulus, we should expect to have seen robust job creation over the entire Bush administration. But even though Bush began two wars of choice (Iraq and Afghanistan), which tends to make the military-industrial complex happy and sometimes also creates more jobs as soldiers go to war and others have to fill in back home, neither the war machine nor the temporary tax cuts managed to crank up the economy past weak growth.

The Obama administration takes as a given extending the Bush tax cuts to everybody earning less than $250,000. Most people in government probably think of that as an average wage, but folks making $250,000 are actually quite well to do. The Administration also proposes continue to “patch” the AMT to protect the upper middle class from paying that tax. The media keep repeating that “originally it was intended to ensnare millionaires and now it gets people at lower incomes” but they never read the history. For a long time, the AMT has been intended to get people who have quite high income ($250,000 to $500,000 qualifies) and who have lots of “preferences” that reduce the amount of tax they pay too much. Instead, the AMT expands the base and taxes it at a nearly flat rate. We need to make some corrections to the AMT, but we don’t need to protect the $250,000 to $500,000 group from its impact.

The Obama administration has scaled back its proposals aimed at companies that shift profits offshore. It won’t include a proposal to drop the check-the-box rules–an administrative change that facilitated all kinds of offshore gamesmanship by the big multinationals. Instead, the administration proposes to crack down more on transfer pricing. My view–it will be hard to make the crack down effective, because this is a place where businesses have the facts and can manipulate the results. It’s clear, though, that the transfer pricing changes are targeting the right area–the transfer of intangible properties that are created in the US, so that future profits are offshore. But will the concept of “excessive returns” do the trick? Not sure.

Obviously, big businesses lobbied with complaints about their “competitiveness” to get these watered down provisions. This is just whining–but whining that works on vulnerable congresspeople who don’t want to recognize that the US, after all, is a tax haven, with lower effective corporate tax rates than most OECD countries. It isn’t the tax structure that is keeping US corporations –like Campbell Soup, GE, and Caterpillar–from competing. It may be their over-paid management that has lost the ability to think lean and act smart.

Other business tax changes proposed here don’t make much sense. Making the research & development credit permanent is another one of those crazy giveaways that will reward drug companies for developing a tweak to a patent that keeps them in monopoly profits a little longer and raises our medical care costs even faster. We should instead be investing that tax expenditure money in funding basic research at universities. The expensing writeoff for businesses investing in equipment is just another concession to the lobbying–nobody has shown that it works, and it probably doesn’t work to create jobs. But we keep doing it anyway.

So is there anything I like. Yes. The proposal to ensure that carried interest is characterized appropriately as compensation income. The managers of big equity funds have been playing a game with their wages for years–one that is not clearly sustainable under the Code as written. They claim they earn capital gains, and then they defer their income “to boot” by claiming to work for offshore companies that are essentially mailboxes in the Caribbean run by people in the US. That tax dodge shouldn’t work to start with. And the Congress surely should make sure it doesn’t with a clear statement clarifying the law that such items are 1) compensation and 2) earned currently.
crossposted with ataxingmatter