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Tax discussion in the State of the Union Address

Based on the prepared text of the SOTU, President Obama mentioned taxes seven times in the address (leaving aside a reference to "how and where your tax dollars are being spent"). Herewith some quick reactions to each mention:

1) ?Thanks to the tax cuts we passed, Americans' paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.?

OK, might as well take credit for the stimulative effects, though (reflecting political constraints) it wasn't textbook stimulus design.

2) "We need to get behind this innovation [in alternative fuels]. And to help pay for it, I'm asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don't know if you've noticed, but they're doing just fine on their own. So instead of subsidizing yesterday's energy, let's invest in tomorrow's."

Oil companies' tax breaks have rightly been under fire since at least the 1930s. Some, such as "percentage depletion" offering greater than 100% cost recovery, have indeed gone under the knife over the years. But plenty of oil company tax breaks remain. Among today's big-ticket items, I consider expensing of intangible drilling costs to be especially egregious - in effect, a "drain America first" incentive, as I said in a recent post. But these items are exceptionally well-defended politically. The oilies have enormous political clout and know how to use it.

3) "To compete, higher education must be within reach of every American. That's why we've ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students. And this year, I ask Congress to go further, and make permanent our tuition tax credit ? worth $10,000 for four years of college."

We don't need higher education to "compete" with other countries - we need it for our own sake, so people can be more productive and lead better lives. He is noting redesign of loan programs to cut out banks' middleman profit, which I've heard was a genuine success though I don't have much firsthand knowledge on this point. The merits of the tuition tax credit (and who captures the benefit) are also, I believe, a bit disputed.

4) "Over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.

"So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years ? without adding to our deficit."

I won't add much here as I discussed corporate tax reform in a prior post. There's some question as to how far along the Administration is in thinking about this topic. He does not appear to be suggesting that he'll make a proposal, as opposed to commending corporate tax reform to the two parties' attention. Unclear to me what the Republicans would see themselves as gaining if they were to answer the call.

5) [Endorses the Fiscal Commission?s] ?conclusion ... that the only way to tackle our deficit is to cut excessive spending wherever we find it ? in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.?

This is the Republican view that the deficit is just a "spending" problem, not a revenues-versus-outlays problem, with the extra twist of explicitly defining tax expenditures as spending - an approach not echoed, for example, in the House's new "CUTGO" rules.

The tax expenditure "frame," under which repealing, say, the home mortgage interest deduction would be a "spending cut" rather than a "tax increase," is more accepted now than it was 10 years ago, but still in the end an impossible sale to make politically. More on this in my forthcoming (I hope) piece on 1986-style reform.

6) "And if we truly care about our deficit, we simply cannot afford a permanent extension of the tax cuts for the wealthiest 2% of Americans. Before we take money away from our schools, or scholarships away from our students, we should ask millionaires to give up their tax break."

A discussion that obviously is to be continued in the 2012 election and thereafter. If he wins the election but the Republicans end up with both houses of Congress, same impasse as in late 2010. But he might find himself in a stronger position from the much discussed "hostage" standpoint, as he'd have less to lose from letting all of the tax cuts expire (not facing reelection again, and perhaps with economic recovery being a bit further along).

7) "[T]he best thing we could do on taxes for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them."

Even more passive, so far as the Administration's projected role is concerned, than the mention of corporate tax reform. "You first, fellas," he appears to be saying, "but please keep me posted."

Full post as published by Start Making Sense on January 25, 2011 (boomark / email).