In his State of the Union address, President Barack Obama outlined a number of significant tax reform proposals that he said would spur domestic economic growth, encourage job creation and require the wealthiest Americans to pay more in taxes.
George Yin, a University of Virginia School of Law professor and former chief of staff of the U.S. Congress' Joint Committee on Taxation, discussed his reactions to Obama's proposals. He is a leading national expert on tax policy and reform.
Which of President Obama's proposals did you think were the most notable?
The two most notable ideas were to make sure millionaires pay an income tax rate at least as high as middle-income taxpayers (the so-called "Buffett rule"), and to impose additional taxes on businesses with certain types of income earned outside the U.S. The details have not been specified but, as I understand it, the Buffett rule would impose at least a 30 percent tax on millionaires.
Do any of the proposals have a chance to pass?
Not this year. The Buffett rule has been proposed before, and the proposal relating to offshore earnings has been debated off-and-on for a number of years. Both would be quite controversial and it is hard to imagine either one being passed in this presidential election year. Should the president be re-elected and propose them again next year, I could see either or both rules being approved then in some form.
Do you think any of the president's proposals are a good idea? Are any a bad idea?
Depending upon how it is achieved, I think part of the Buffett rule might make sense. One reason high-income (and middle-income) taxpayers are able to reduce their tax liabilities is because they are entitled to certain special allowances in the tax law, such as the mortgage interest deduction. These allowances generally have a non-tax purpose, such as to encourage and subsidize home ownership. In a period of very limited government resources, it would be reasonable to reduce or curtail completely the benefit of these allowances to higher-income taxpayers who have the economic resources to obtain the desired end (home ownership) without the government help. If these allowances were taken away from millionaires or higher-income taxpayers, it would increase their rate of tax.
Other parts of the Buffett rule may make less sense. For example, one reason high-income taxpayers end up paying a preferential rate of tax is because a lot of their income is capital income (such as dividends and capital gains) which is taxed at a maximum rate of 15 percent. This rule perhaps should be revised, but it is not clear any revision should apply only to millionaires. Moreover, whether the rule should be revised is complicated. In part, the 15 percent rate compensates for the corporate tax, which may be imposed on the same income. Also, capital is often easily transferred across borders, so in determining the proper rate of capital income in a given country, consideration must be given to how other countries tax the same income.
The proposal that would tax businesses more heavily on certain income earned outside the U.S. may also be sensible, depending upon how the rule is implemented. In general, current law taxes offshore income quite favorably, and then imposes a potentially significant tax when the earnings are repatriated to the U.S. This rule may encourage offshore business activity and then "lock out" the earnings when it would be sensible to return them to the U.S. A better combination would be to increase somewhat the upfront tax cost of doing business outside the U.S., but then to allow earnings outside the U.S. to flow back to this country at a reduced tax cost (to minimize the "lock-out" effect). If the administration's proposals are fashioned in this way, they may make sense.
What tax reform would you like to see?
In general, I would favor (1) a more comprehensive income tax base, with reduced and fewer allowances subsidizing consumption choices made by taxpayers; (2) reduced tax rates that are consistent with the country's need to begin addressing the extremely challenging intermediate-term budget deficit situation; and (3) reform that tends to favor savings and investment over consumption.
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