New Year's Resolution for Obama

From Market Watch:

When David Axelrod, chief political adviser to President-elect Barack Obama, went on "Meet the Press" last weekend, he still wasn't ready to make a commitment about leaving the Bush tax cuts on high earners in place until they expire in 2010.

As a political guru, Axelrod probably shouldn't be too specific about economic policy, but his caution on this issue is symptomatic of a troubling slowness in the Obama transition team to adapt to the changed economic realities when it comes to taxes.

The campaign is over and the economy is in much worse shape now than it was when Obama first designed his tax platform more than a year ago.

No one should be thinking of raising any taxes now by repealing tax cuts -- an alternative Axelrod said was still open. The question is more whether these tax cuts should be extended after all as another form of fiscal stimulus to flank the planned spending measures.

Axelrod, almost in the same breath as he spoke of a fiscal stimulus likely to exceed $700 billion, said we can't afford to keep these tax cuts on the wealthy. If you're planning a massive Keynesian-style fiscal stimulus that will swell the federal deficit to well over $1 trillion, why keep harping on the incremental tax revenue from these rich people?

Obama Drops Big Oil Tax as Prices Plunge

From Business Week.com:

President-elect Barack Obama won't pursue a windfall-profit tax on oil companies because crude prices have dropped below $80 a barrel. The pledge to pursue taxes on Big Oil—a key constituency and benefactor of the Bush Administration—was a potent campaign issue for many left-leaning Obama supporters and a key point of populist rhetoric as gasoline prices surged above $4 per gallon this summer. But that was then. Oil has since sunk below $50 per barrel, and with the country facing a deep recession, the incoming Administration has put new taxes on the back burner.

The Obama camp won't discuss the issue directly, with an aide on the transition team acknowledging the adjustment on Dec. 3, but speaking only on the condition of anonymity. Some liberal publications have already begun criticizing Obama for false advertising during the campaign. On Dec. 2, Mother Jones posted an online blog entry: "Obama's First Policy Retreat?" And The Huffington Post ran "Mandate Watch: Obama Backs Off Promise to Pass Windfall Profits Tax on Big Oil,", arguing that Obama is giving the industry a free pass on profiteering.

5 Ways to Change the IRS

Independent journalist David Cay Johnston recently published an article titled Change and the IRS, which you can download via TaxProf blog by clicking here. In the paper Johnston acknowledges that the federal government needs revenue, and suggests 5 ways to change the IRS to benefit both taxpayers and the government.

1. Make English, and not bureaucratese, the first language of the IRS? Taxpayers are the users, and IRS forms should be friendly. Period.

2. Hire Stanford's Joseph Bankman to make real a brilliant idea he proposed in Tax Notes -- letting most people pay their income tax without filing.

3. Stop the consumer fraud inherent in letting anyone prepare a tax return for a fee.

4, With the right technology, the IRS will be able to do something much more important than process tax returns. It will, like Oracle, be able to analyze data to detect patterns and identify not just blatant cheats, but chiselers.

5. Hire tens of thousands of auditors. Last year the audit odds were 1 in 263, down a third from the peak year of 1998, both much too low to deter anyone but a Casper Milquetoast.

Let's Have a Real Middle-Class Tax Cut

From the Wall Street Journal:

President-elect Barack Obama is right: America needs a real and meaningful middle-class tax cut. Unfortunately, despite the rhetoric, that is not what his proposals offer.

Mr. Obama's tax plan includes creating or expanding nine or more federal income tax credits mostly focused on low- and moderate-income earners, with an estimated cost of $1.3 trillion over 10 years. These tax credits are provided for certain social purposes, such as child care, health care, education, housing and retirement. Buried amid these is Mr. Obama's purported tax cut for the middle class.

For the bottom 40% of income earners, who pay no federal income taxes on net today, these refundable income tax credits will not reduce tax liability but instead result in new checks from the federal government for the targeted social purposes. That's not a tax cut. It's welfare.

These tax credits will do little or nothing to promote economic growth because they do not reduce marginal tax rates -- the rate on the next dollar of income -- to provide powerful, meaningful incentives for productive activities such as investment, entrepreneurship and work. A tax credit is effectively a cash grant that can only affect incentives up to the amount of the grant. Indeed, such tax credits would likely reduce economic growth because the credits are phased out as income rises, and so effectively impose higher marginal tax rates over those income levels.

For a real middle-class tax cut, we should cut the 25% income tax rate that now applies to single workers earning $32,550 to $78,850, and married couples earning $65,100 to $131,450. We should reduce that rate down to the 15% rate paid by workers below these income levels. That would, in effect, establish a flat-rate tax of 15% for close to 90% of American workers.

Marginal tax rates for middle-income families in the 25% tax bracket are too high. Add in effective payroll tax rates of 15% and state income taxes, and these workers are laboring under marginal tax rates of close to 50%. No wonder middle-income wage growth has slowed sharply. Reducing the marginal tax rates for these middle-income earners would lead to income increases for middle-income workers, just as reducing excessive marginal tax rates for higher-income workers did, going all the way back to the Kennedy tax cuts of the 1960s.

This 40% cut in middle-class income tax rates would provide a powerful boost to the economy, greatly expanding incentives for savings, investment and work. This would be much more effective than Mr. Obama's tax plan with it's $1.3 trillion in redistributive tax credits, as well as yet another so-called stimulus package based on another $300 billion or more in increased government spending.

Obama to Delay Repeal of Bush Tax Cuts

President Elect Barack Obama has not yet even taken office, and yet he is already looking to break some of his campaign promises. According to Washington Wire, “A senior adviser to Obama confirmed that New York Federal Reserve President Timothy Geithner would be the administration’s nominee for Treasury secretary, and added that the Obama team was gratified by the late rally on Wall Street on Friday after news of the pick leaked out.”

During an appearance on NBC’s “Meet the Press,” Obama economic adviser William Daley suggested that the incoming administration would reconsider whether to quickly increase taxes for Americans earning more than $250,000 per year.

Daly, who was commerce secretary under former President Bill Clinton and is the brother of Chicago Mayor Richard Daly, said it looks “more likely than not” that Obama would not seek legislation to repeal President George W. Bush’s cut in the tax rate for the wealthiest Americans before it is scheduled to expire after the 2010 tax year. Bush cut the top rate to 35% from 39.6% in 2001.

Obama had promised to restore the top tax rate to its earlier level, while cutting taxes for the middle class.

Obama's Planned Increase in Top Tax Rate Contrary to International Trend

From Tax Prof:

As the United States awaits to see how President-elect Obama implements his campaign promise to increase the tax burden on those earning more than $250,000 per year, KPMG has released a new study (Individual Income Tax Rate Survey 2008) documenting a downward trend in the highest tax rates in 87 countries over the past six years, from 31.3% in 2003 to 28.8% in 2008:

We have concentrated on the highest rates of tax payable to central government in each country, and for ease of comparison we have, where possible, excluded other taxes like social security contributions, municipal taxes and employment taxes.

The picture that emerges is of a slow global decline in top rate personal income taxes, from an average of 31.3% in 2003 to 28.8% in 2008. But this conceals some very different tax histories at a regional and country level.