Tax them, not me, and by the way I want everything for free

Today President Obama will unveil his $3.77 trillion budget proposal that would replace the sequester with specific spending cuts, raise taxes on millionaires, and reform social security and medicare to reduce their costs. The Washington Post reported this morning:

Obama’s deficit-reduction plan mirrors the offer he made in December to House Speaker John A. Boehner (R-Ohio) in negotiations over the so-called fiscal cliff. At the time, Obama called for $1.2 trillion in new taxes. The fiscal cliff deal included roughly $600 billion in new revenues over the next decade, with the bulk of the money coming from higher rates on households earning more than $450,000 a year.

Obama is now proposing to collect the rest of the revenue by limiting itemized deductions — other than charitable contributions — for families in the top tax brackets and by imposing a minimum tax rate of 30 percent on households earning over $1 million a year.

Another $1.2 trillion in savings would come from cutting spending over the next decade on programs across the federal government. But the most politically significant reductions would come from trimming payments to Medicare beneficiaries and providers, and applying a less-generous measure of inflation to government programs, including Social Security.

Republican leaders have already told the President no. To them, compromise means doing everything they want to do and nothing they don’t.

While I’m very excited about the political tussle that will now take place, I would rather be having the big debate on the future of our economy and how we will get the revenue the country needs to build it.

A civilized society isn’t free. Education, transportation, health care, a social safety net, food safety, national security, and much more cost money and like everything else, they aren’t getting cheaper. Unfortunately federal tax revenue hasn’t kept up, with carve outs for the rich and powerful being some of the biggest culprits. To be fair most Americans pay less in taxes then they did 50 years ago.

To help deal with this problem I have believed that corporate taxes should remain at current rates, the only reform being the elimination of loopholes. Charts like the one below make a compelling case:

So thank you to Matt Ygelesias for his piece in Slate today on the corporate tax rate. He correctly points out that behind those loopholes are middle class workers and jobs, something I hadn’t contemplated (I don’t mind taxing the middle class more, overall the federal tax burden on Americans has never been lower). Ygelesias ends his piece with some very interesting solutions:

Rather than trying to mend the tax, we ought to end it and replace it with something else. My preference would be to structure its replacement to ensure that the costs are born by rich executives and wealthy shareholders rather than middle-class workers. That suggests curbing the current tax preference for dividend income over labor income. That way corporate profits that are paid out to firm owners would end up being taxed about as much as they are today, but profits reinvested in hiring new workers and expanded capacity wouldn’t be. Or if the concern is that too much of the benefits of a corporate income tax cut would accrue to highly paid executives, we could raise the payroll tax cap so highly compensated workers would pay more. A conservative might prefer to replace the corporate income tax with cuts to Medicaid or the EITC to make low-income families pay. The whole range of options is worth debating. But the goal should be to replace the mystery meat of the corporate income tax with a clear target. Pick who or what we want to tax, and tax it deliberately.

This isn’t a new idea. After World War II our corporate tax structure was designed to encourage companies and investors to pour their money back into firms. This is a debate we continue to avoid, especially in Congress.


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