Sunday, November 23, 2008

obama and taxes

This is supposed to be a tax blog, so people may wonder why I don't talk more about tax policy. The truth is that I have never been especially interested in technical tax issues, which I think are by and large boring, and have instead taken what might be called a New Haven view of taxation, as an example of broader issues of public ordering best explored at a conceptual level. But there is a real world out there, and every now and then once has to take notice.

Which brings us to the Obama tax proposals. As I understand the broad scope of the proposals, they amount to the following:

1. Repeal the Bush tax cuts above some specified income level ($250,000, $150,000, etc.)

2. Close assorted tax loopholes (especially for corporations) and engage in a more aggressive war against tax shelters, perhaps involving some form of economic substance idea. A special animus is reserved for provisions that encourage the "export of American jobs," presumably meaning deferral rules for foreign income and other similar tax breaks

3. Enact temporary or permanent tax cuts for taxpayers below a specified level (see #1 above) together with targeted incentives, a la Clinton, for desirable forms of behavior

I don't have any particular problem with #1 except to note that, depending where the cutoff is, it may or may not have substantive as opposed to symbolic meaning. (There was talk today of the whole concept being deferred as part of the stimulus package, which sounds awfully Republican to me, but that's another story). #3 is similarly understandable, at least for a liberal Democrat, although I think that it is somewhat pointless, and risks a Carter-like incrementalism (the proposed cuts would necessarily be rather small) that seems inconsistent with the gravity of the economic situation.

The most interesting is #2, especially the foreign component. No doubt it is frustrating to U.S. policymakers to tinker with domestic tax rates only to watch the money disappear in international transactions. Closing foreign tax loopholes is also a political no-brainer: foreigners don't vote in U.S. elections, and the argument I sometimes heard in Washington--it's OK that we don't pay U.S. taxes because we pay a high rate in Saudi Arabia--isn't likely to hold much water with the American electorate.

The problem, of course, is that these "loopholes" are more of less fundamental parts of the international tax structure, and probably can't be closed without trampling on a lot of toes or, at very least, without substantial foreign cooperation in information-sharing and other matters. Thus, while every administration talks about changing the international tax rules, most have had relatively little success in doing so. Closing international tax loopholes is also to some degree inconsistent with raising domestic tax rates, which is likely to increase rather than decrease the desire for tax avoidance, although I believe Obama is so far talking more about individual than corporate tax increases.

Perhaps Obama's biggest contribution will be to improve the international standing of the U.S. and thus, if only indirectly, the level of cooperation in tax matters. It's an article of faith among international tax scholars that serious steps against tax avoidance require this cooperation, and equally obvious that cooperation in tax matters cannot be divorced from that in other areas. Some have begun, quietly, to suggest that we need to begin thinking of a global tax system that trades off some national sovereignty in tax matters for precisely this form of joint action: the EU model, if you will, but over an infinitely larger and more complex area. Don't expect Obama to talk in these terms any time soon. But sooner or later we will get there, and it is to be desired that his Adminstration will take the first steps.


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