Hunting for Surprises in the Obama Budget

It is somehow fitting President Obama released his budget for Fiscal Year 2014 after Easter, a mere 65 days late—but who’s counting? Fitting because going through Obama’s budget is like an Easter egg hunt for which those in charge of hiding the eggs are masters of their craft. It takes time to find all the eggs mixed in among all the pretty plastic flowers of budgetary spin, and each one brings a new sense of awe and amazement if not delight.

Nowhere is awe and amazement in greater abundance than in Obama’s tax proposals. The President highlights his renewed attempts to raise $583 billion in new taxes on investors, savers, small businesses, and upper-income taxpayers generally. But according to the Treasury Department’s documentation of the President’s budget, the net tax hike is $1.1 trillion. Even then there’s a caveat: A footnote in the Treasury document refers to additional tax hikes included in the budget’s revenue tables.

The discrepancy between the tax hikes the President touts and the total of his tax package is especially material in light of his claim that the $1.8 trillion in deficit reduction in his budget relies on $2 in spending cuts for every $1 in tax hikes. This statement is clearly false when the budget includes $1.1 trillion in tax hikes.

The curiosities grow, however, in turning to the President’s proposals for corporate tax reform. The budget correctly observes that “in an increasingly competitive global economy, we need to ensure that our tax code contributes to making the United States an attractive location for entrepreneurship and business growth.”

His budget goes on to call for “revenue neutral” tax reform that closes tax loopholes and lowers the corporate tax rate. So far, so good, because in order to succeed, tax reform should be revenue neutral, lower the corporate tax rate, and have the President’s active participation.

Then, one searches a little further for the interesting policy Easter eggs. While the budget shows a reserve for budget-neutral tax reform, the proposals actually score as a $94.6 billion tax hike. This is not revenue neutral, as the text ultimately acknowledges when it notes that these revenues are not included in the budget’s totals.

Obama’s budget calls for closing loopholes, and he has proposals to do so, identifying specific items to which he objects, such as normal tax treatment for fossil fuel production. Then one scans the pages to see that rather than clean up the tax code by eliminating loopholes, the President would merely replace one set of provisions to which he personally objects with another set which he personally favors, such as a new tax credit for alternative-fuel commercial vehicles. This is a perfect example of how the tax code got into the mess it’s in today—politicians using the tax code for their pet projects.

In calling for business tax reform, the budget specifically cites the need to lower the corporate tax rate. Exactly right. The trouble is that the budget includes no such proposal. If the President’s business tax reform were enacted as it is laid out, the corporate tax rate would remain 35 percent. On the other hand, if the President’s net loophole manipulation exercise raising $95 billion is supposed to pay for lower corporate rates, then he might get the rate down to 34.5 percent—underwhelming to say the least.

Notice, too, the budget calls this “business tax reform” but only refers to a reduction in the corporate income tax rate—no mention of a reduction in the tax rate on sole proprietorships, S corporations, or other business forms other than the traditional corporate form. The implication is clear: If enacted as a revenue-neutral reform with a corporate rate reduction, the net effect would be to shift tax from corporations to small businesses. This after the President just advocated and signed into law an enormous income tax rate hike for small businesses.

One might infer from this that the President really has it in for small businesses and favors big business, but that would be only half right. Amongst the budget’s other revenue proposals is the return of Obama’s Buffett rule proposal. Recall that this proposal would set a minimum tax of 30 percent of adjusted gross income (AGI) less a credit for charitable contributions for taxpayers with incomes in excess of $1 million.

In reality, the Buffett rule proposal is just a backdoor way of raising the dividend and long-term capital gains tax rates to 30 percent. Few if any taxpayers with over $1 million in wage and salary income pay less than the top income tax rate of 39.6 percent. The President, of course, knows he would have no chance of inducing Congress to go through the front door to raise the dividend and capital gains tax rates so high, especially not after having just raised them to start the year. So he tries the backdoor labeled Buffett.

Dividends, of course, are paid by corporations. And a big chunk of realized capital gains arise from the sale of corporate shares. So put the President’s business tax reform and his Buffett rule proposal together. His business tax reform, were it actually to include a corporate rate reduction, would raise small business taxes and cut corporate taxes. But his Buffett rule proposal raises taxes on corporate shareholders, negating in whole or in part the reduction in the shareholders’ gains from business tax reform. The President talks about making the United States “an attractive place for entrepreneurship and business growth,” but his tax proposals would do just the opposite.

No doubt more and more interesting nuggets will come to light as analysts discover Obama’s most carefully buried policy Easter eggs. One thing is for certain: The President displayed an interesting sense of humor and irony when he suggested at his budget press conference that “there’s not a whole lot of smoke and mirrors in here.”