As part of the series “A Rooseveltian Second-Term Agenda,” advice on revamping the tax code to raise the revenue we need.
Our current tax system is a toxic legacy of the George W. Bush years. It loomed over Obama’s first four years, bearing deficits that limited the scope of economic stimulus, drove inequality to astonishing levels, and led directly to the debt limit showdown of the summer of 2011 that forced us into even more dangerous policies. President Obama’s second term offers a long overdue opportunity to restore the promise of progressive taxation and revenues that are adequate to our long-term economic priorities. It requires both short-term and long-term action.
The greatest failure of the tax system is not that it’s too complicated or inefficient or that there are too many “special-interest loopholes,” as House Speaker John Boehner put it on the day after the election. It’s that it doesn’t raise enough money and it encourages all sorts of manipulation because of the differential rates for investment income and income from work. These are not things that developed over time, as if by some natural process — they are the product of specific decisions made in 2001 and 2003 by Republican-controlled Congresses that used the budget reconciliation process to avoid any bipartisan compromise.
Here are some principles that the administration should hold to in restoring adequate and progressive taxation:
1. Start from the law, not current tax policy. Under the law, the Bush tax cuts expire on January 2, 2013 and revert to their levels at the prosperous end of the 1990s. This expiration, along with several temporary tax cuts that expire at the same time and the budget sequester devised to escape the House GOP blackmail on the debt ceiling in 2011 is what’s known as “the fiscal cliff.” There will be an effort to negotiate a deal on taxes and spending before we hit the cliff out of fear that expiration of all the cuts at once would tip the country back into recession. But the effect won’t be felt at once, and there’s plenty of time to negotiate a new round of cuts once the law as written goes into effect. There is no reason to negotiate based on rates that are set to expire within weeks or days.
Under the law, capital gains rates will rise to 20 percent from 15 percent, dividends will be taxed at the same rate as regular income, and two provisions that limit personal deductions and exemptions for the wealthy will come back into effect. All tax rates will rise, but the tax code will instantly be fairer, by every definition, than it was in December. From that baseline — which is not some accident; it’s what the law calls for — we can have a debate about which rates should be permanently lowered. There’s a strong argument, for example, for bringing the bottom rate back down to 10 percent, given that these are the households that were hit hardest during the recession and saw few gains even during the prosperous years before 2008.