After ending up with more pie on his face than the late Milton "Soupy" Sales, President Obama continues to press for his tax deal with the hostage takers. But he's added a new wrinkle, suggesting that next year he will press for full-scale tax reform, a rewrite of the tax code that does away with many deductions, lowers marginal rates, and still raises more revenue.
Hmmm, where have we just recently heard that before? Cat food, anyone?
But Obama did not say that he would move to adopt the tax recommendations of the Simpson-Bowles commission per se. He's playing his cards, if he has any, closer to the chest than that. What are his strategic options? Could he use this to undo the damage of the current surrender, and re-establish himself as a leader?
If he pulls this off, it could be the toughest fight of his presidency. It would be harder than health care reform, and he'd have to do it with Republican support in the House, not just the usual Senate supermajority. That's hard to do unless you're doing a Republican plan. So Obama is facing a crossroads if he takes on tax reform.
a) Come up with a progressive plan, one that addresses the real problems with the Bush cuts, removes the crap from the deductions, leaves the lower 90% intact, and restores his relations with the Democratic base.
b) Come up with a "centrist" plan, one that favors the rich, has strong support from Republicans, and makes the Villagers happy. He loses his base but gets the support of 50% of the remaining 235 or so remaining "centrists" outside of the beltway, only 40% of whom had been planning to vote for him anyway. But David Brooks praises him, which he'll consider to be more important than anything else.
It's a tough call. What should we watch for?
The key to the Bush tax cuts is not the marginal rates. That's a common misunderstanding. The marginal rate on ordinary income above $2M/year could be raised to, say, Eisenhower levels (91%), and it would pick up next to nothing. The problem is that Bush redefined the rules, so that ordinary income is for saps. Big money never comes as a salary. It comes as interest, as dividends (you own the company and it's your share of the profit), or it comes as capital gains.
Before Bush, dividends were counted as income, added to earned income, and covered at the marginal rates. Afterwards, they were moved to a special category, taxed at a lower rate -- only 15%. Before Bush, short-term capital gains (less than one year) were taxed as regular income rates, but long-term gains were subject to a 50% deduction and then taxed at the ordinary rate. Long-term deductions make some sense, both because it gives an incentive to invest for the long haul (lordy knows American business has too much short-term thinking) and because it crudely recognizes inflation (grandma's house was $40,000 in 1956 but sold for $500,000 now). But after Bush, and in the Obama deal, long-term gains taxes are again capped at a fixed, low rate -- 15%.
Who are the highest-income "earners"? Banksters and hedge fund managers get huge sums. But they are often in the form of stock options. An option lets you buy stock at a discount; when you sell the stock, it's a capital gain. Hedgies, some of whom make a billion ! dollars a year, are allocated shares of the funds' gain. Under the current ridiculous rules, they can be allocated, as compensation, a share of the funds' dividends and long-term gains on the shares that the fund has owned. So it's really their paycheck, but they only pay 15% on it.
If the rate goes up on people who make more than $250k, most of the impact will be felt by high earners in the 97th and 98th percentile. Surgeons and other medical specialists, C-level executives, and other highly-skilled people get high salaries. But the real money is with the 99.9 percenters, and currently exempt from the marginal rates. So if tax reform is to be anything but another gift to the filthys, it has to do away with such special treatment of dividends and capital gains. Indexing long-term gains still makes sense, but only against marginal rates. This is where Obama will have to either show some strength or demonstrate that he is again going to surrender.