The Guardian Unlimited, December 14, 2010
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Last week we learned that President Obama intends to push for comprehensive tax reform. We also learned that Peter Orszag, who until recently headed up the Office of Management and Budget (OMB), will be taking a top job at Citigroup. These two events may seem to have little in common, but unfortunately they are intimately related.
With comprehensive tax reform, as President Obama told us, everything is supposed to be on the table. That sounds great. As everyone knows the tax code is a mess. It is full of items that may have at one time served a purpose, but now just hand money to powerful interest groups. Who could be opposed to cleaning up the muck?
If the group of people designing a new tax code really had the public interest foremost in their thoughts there is much good that could be done. The mortgage interest deduction in its current form is an utter absurdity. Most low- and middle-income people get little or nothing from this deduction. By contrast, millionaires often pocket tens of thousands a year in tax savings.
Even worse, the incentives are 100 percent wrong. We are encouraging wealthy people to buy bigger more expensive homes with this tax break. Think of some of the various competing uses of public funds: extending daycare and preschool education, financing energy conservation measures, providing benefits to the unemployed. How many people would put subsidizing a more expensive home for successful lawyers and doctors at the top of this list? That is what we are doing now with the current tax code.
The same story applies to retirement savings. Most low- and middle-income people benefit little or not at all from the current pattern of saving subsidies.
This is due partly to the fact that workers can do little savings at a time when their incomes have not kept pace with inflation. However, even when they do manage to put money aside for retirement, the tax subsidy is much smaller for the vast majority of workers who are in a 10 or 15 percent bracket, as opposed to the wealthiest in a 35 percent bracket. Do we really need to hand thousands of dollars in tax breaks to persuade wealthy families to do saving they would have done in any case?
Another item crying out to be dumped on the refuse heap is the special lower tax rate for capital gains and dividend income. Ordinary workers can’t ask their boss to pay them in a form that will show up on tax returns as capital gains. By contrast, CEOs can arrange to get paid in ways that will be taxed as capital gains, allowing them to pay a lower tax rate than millions of ordinary workers.
There are hundreds of other areas where the tax code is both grossly unfair and leads to major economic distortions. We might hope that these will be fixed with comprehensive tax reform, but we have to go back to Peter Orszag and Citigroup.
One item that has never featured prominently in public debate in Washington is a financial speculation tax or some equivalent tax on the financial industry. This is striking because it is potentially a source of a vast amount of revenue, more than $150 billion a year by my calculation. The bulk of this money would come at the expense of the rents earned on Wall Street. This is the reason that even the IMF, an institution not known for being hostile to banks, now advocates new taxes on the financial sector.
Why do the folks in power in Washington seem unable or unwilling to consider a financial speculation tax? Let’s imagine for a moment that during his stint as OMB director Peter Orszag had been a vocal advocate of financial speculation taxes. It doesn’t seem likely that under these circumstances Citigroup would currently be offering him a job that, according to the New York Times, would typically pay $2 to $3 million a year.
Orszag and others in a similar situation undoubtedly understand how the positions they take in their roles in government can affect their future career options. Since many of these officials are obviously motivated in part by the lure of such huge paychecks (i.e. they take the jobs), it is reasonable to infer that the prospect of big-paying jobs on Wall Street and elsewhere affects the positions they advocate in the Obama Administration and Congress.
In other words, President Obama is not being truthful; everything is not on the table. The items that matter most to the rich and powerful will not be called into question because their interests are being protected. As far as the rest of us – as President Obama often said on the campaign, “you’re on your own.”