Just scratching the surface
Published 1:49 pm Saturday, April 14, 2012
With millions of Americans stressing over their federal tax returns this weekend (they’re due Tuesday), President Obama has tried to seize on their angst by promoting one notion of tax fairness.
In interviews and on the campaign stump last week, he argued that the wealthiest Americans, who end up paying a lower effective rate than many middle-income taxpayers, aren’t contributing their fair share. He proposes the Buffett Rule, named after billionaire investor Warren Buffett, who has complained that he shouldn’t be taxed at a lower rate than his secretary. It would ensure a higher rate for income above $1 million.
As a political tool, it’s powerful, even though it does little to reduce the federal deficit. Polls show it resonates with voters. Senate Democrats plan to grandstand on the issue by bringing a Buffett Rule bill to the floor on Tax Day, even though it has no chance of getting past a filibuster.
We favor the Buffett Rule, but the recent fixation on it oversimplifies the tax-fairness issue, and averts attention from the many complex ailments of the convoluted U.S. tax system. What voters need and deserve this election season, from Obama and presumptive Republican nominee Mitt Romney, is a far broader, detailed debate over how to make the tax system more straightforward, efficient and fair.
The biggest reason most of the ultra-rich pay lower effective tax rates is that so much of their income is generated from investments, and taxed at around half the rate of regular income.
Republicans argue that lower tax rates on capital gains encourage investments that allow businesses to grow and create jobs. Many Democrats counter that the additional investment activity realized by lower rates is minimal. They say investors pay more attention to quality opportunities than tax rates, and that lower rates serve mostly to enlarge individual fortunes rather than putting more dollars to productive use.
Those points of view ought to be a thorough point of debate between Obama and Romney this summer and fall. So should specific ideas for simplifying the tax system by reducing and eliminating the many credits, deductions and other incentives — known as tax expenditures — that have reduced revenue and made the tax code all but impossible for average taxpayers to understand.
The House Republican budget embraced by Romney calls for huge savings through the elimination tax expenditures, but doesn’t detail them. Why? Because proposing the elimination or reduction of popular breaks, like mortgage-interest deductions or tax-free employer-provided health insurance, would make taxpayers and special interests scream.
Yet a serious discussion about deficit reduction can’t occur without including major tax reform. When candidates trumpet changes that only scratch the surface, or say they support reform without being specific, they’re avoiding the tax talk America really needs.
