President Obama has tried to position himself as a post-partisan Robin Hood, protecting the interests of the working class against rapaciously greedy working professional married couples with $250,000 incomes (bling-bling). He better stock up on Speedos, because his tax policies will leave us treading water for the next decade.
As I discussed yesterday, a dart-throwing monkey could put together a list of Obama's talking points for any given speech on tax policy. But, all fun aside, the posture of the U.S. political left on tax policy contains the seeds of its own undoing.
So what's the major flaw with the direction of Obama's tax policy?
The Obama administration and its cheerleaders generally believe that the solution to any budgetary issue is to "raise taxes on the wealthy" and to "close tax loopholes for greedy corporations." They make exceptions for favored industries and favored campaign donors, but they stay pretty consistent on message.
On the surface, this seems like good politics. If you convince 98% of the voting public that 2% of the voting public is not paying its "fair share," you can generate healthy majorities in favor of higher taxes on the 2%. At a minimum, you can use the Robin Hood card to get yourself elected or re-elected!
However, the political left harbors a desire to expand government and socialize the funding mechanism for various services (health care, green energy, affordable housing, etc.). The left's appetite for new programs requires new tax revenues. Mind you, we're not talking 'new tax revenues to reduce the trillion dollar budget deficit.' We're talking 'new tax revenues to pay for the President's new stimulus plan,' or 'new tax revenues to pay for Obamacare.'
Let me pause and note that politicians on the right have been complicit in the federal spending orgy that created our long-term budget crisis. However, the emergence of the Tea Party has created significant pressure on the right to end its complicity.
So the left needs new revenues, and it boldly declares class warfare on working professionals and their distant cousins in Martha's Vineyard and Sun Valley, the "millionaires and billionaires." In its thirst for revenues, it amends the Internal Revenue Code to create a series of "pay fors."
What do I mean by "pay for"? A "pay for" is a change to the Code that is projected to raise enough revenue to "pay for" a liberal spending objective. In recent years, Congress has enacted numerous "pay fors" without carefully weighing the consequences. One such folly was expanded 1099 reporting for small business (subsequently repealed). Another was the codification of the economic substance doctrine (which has left everyone, from the IRS to the tax practitioner community, scratching their heads).
Here's the thing about "pay fors." Tax policy driven by "pay fors" is no tax policy at all. "Pay fors" are a series of effectively random changes to the Code that are driven by political momentum to pay for a desired spending program. It is impossible to verify that the projected revenues from a given legislative change ever materialize.
And here's the other thing about "pay fors." When the political left closes a "loophole" to fund a new spending program, the revenues from that "loophole" are not available for deficit reduction. For example, President Obama would "pay for" the cost of his proposed stimulus act (ahem, "jobs plan") by raising taxes on the various bad apples described above (working professional married couples, millionaires and billionaires, oil and gas companies, private equity fund managers). However, if that proposal is enacted, we are still facing trillion dollar deficits as far as the eye can see. If the revenues of a new spending program are financed with a "pay for" that changes the existing tax rules, we're effectively trading water.
In this sense, the tax policy agenda of the political left contains the seeds of its own undoing. Sure, we can "pay for" new spending programs (the new stimulus act, Obamacare, whatever) by increasing taxes on the "wealthy" and "big corporations." But we're left treading water from a long-term budget perspective. Meanwhile, the Code gets more complex, and many businesses and individuals spend more time and money on non-productive tax planning and tax compliance activities.
The only way to finance the spending objectives of the political left and to tackle our long-term fiscal challenges is to increase taxes on everybody: rich, upper-middle class, middle class, lower-middle class, and poor. Maybe the left will convince voters and taxpayers that we should move in that direction. I wouldn't put money on that bet.