As you may have heard, President Obama has been talking about taxes. He speaks of his proposal in the language of tax reform, but sadly, when one dives into the details, there's more tax than reform.
In setting forth his principles, the President asserts the need for lower tax rates and fewer deductions. These goals dovetail with the vision of tax reform shared by many pro-growth reform advocates, myself included.
Lower marginal rates promote a more efficient use of capital as taxpayers feel less need to seek shelter for their income in economically less productive activities. Narrowing the universe of tax deductions and credits serves the same purpose and promotes the deployment of capital where it will be used most efficiently. Broadly speaking, this applies to both the corporate and individual tax codes.
President Obama's plan, unfortunately, drops any pretense of reform just beyond its opening paragraphs. After tossing a nod to lower rates, the President's recommendation to the Joint Committee on Deficit Reduction moves on to enumerate the deductions and credits that he says should be eliminated.
The only mention of tax rates is to advocate an increase for higher-income taxpayers by allowing the two highest tax rates for individuals to revert to their pre-2001 levels. All in all, the President's recommendations include a tax increase of almost $1.6 trillion over ten years.
Tax reform should be a major goal of the current Congress, and I am hopeful that we will have the opportunity to consider such a proposal in the coming months. In 1986, Republicans and Democrats came together on a tax reform plan that limited deductions and taxed income at one of two rates: 15 or 28 percent.
Over the years, Congress has added various deductions and credits. At the time, each proposal may have sounded good to a majority, but the combined effect of these provisions has been to produce a complicated tax code that does more to distort investment than to promote economic growth and job creation.
It's time to change directions and work for real tax reform, and in this regard, I'm disappointed in the President's proposal.