Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
The most intriguing question is whether the Obama Administration will take the occasion of the massive deficit to introduce a taxation “game-changer” in the form of a national Value Added or Sales Tax (or “Consumption” tax — long advocated by Obama advisor Warren Buffett) as a way to add more flexibility to the Federal tax base, combined with an actual reduction in both income and corporate tax rates to enable a “middle-class-tax-neutral’ calculation at least at the outset.
There must be tax increases to fund the deficit in order to avoid the much more debilitating “tax” known as inflation if we continue for too long to enable the deficit by the Fed printing money. Sooner or later the “bond vigilantes” on Wall Street or in China will bid up US Treasury yields in an effort to force the Fed’s hand to stop print and raise interest rates, which in turn would nip any expectant housing recovery in the bud by increasing mortgage interest rates, so the Administration and Congress will have to act to keep the bond market happy. (Remember James Carville’s sating that he would like to be reincarnated as the bond market because sooner or later everyone has to do what it wants!)
Thus for Obama its not a question of political “will” in terms of rasing taxes but a case of “pick your poison” Rampant inflation would doom his Presidency anyway.
In any event, Obama clearly opened the door in his speech to Congress to taxing health care insurance packages at the “Cadillac” level, which will affect some big union plans as well as senior executive packages. Most healthcare experts support this idea as a way to recalibrate the incentives adding costs to the healthcare system. (Sort of a Health Care “luxury tax” — it will probably be part of what is passed this year.)
The Administration would like to couple some form of clawback (in a tax sense ) or overseas corporate profits in exchange for lowering the overall corporate rate. This package would be good for small business (which generally does not benefit from the overseas tax exclusion enjoyed today by big multinationals (net of foreign tax paid mostly in lower tax regimes). Ironically, lower corporate rates coupled with the lily demise of the Bush tax cuts and permanent but not complete reduction in the Federal Estate Tax entice small businesses to drop out of “Subchapter S” filing status (at the individual pass through rate ) and opt to be treated as limited liability companies at the corporate rate to the extent permitted by IRS regs, as corporate rates will likely wind up a good deal lower than the highest marginal individual rates when all is said and done. (nobody has thought this through very well yet).
I would doubt there would be a material increase in cap gains or dividends and interest taxes except to clear up some off-shore related loopholes. There is no policymaker-level support for the so-called ‘Tobin tax” (named for the economist who proposed it) on financial transactions that is being discussed in Europe (US multinational banks may need to pay attention, however). This type of tax would be a big mistake for the US in terms of its position as an international financial center, and if Europe does it, it will be a boon to Wall Street.
The “soda tax” may gain traction as part of the VAT or consumption tax package that would be the most creative way, in my view, to work our way out of the operating (including Medicare/medicaid structural deficits we now need to run to clear out deflation recession risks but which must be attacked to avoid serious inflation. (Japan escaped inflation by kicking the can down the road but at the expense of its economy suffering persistent anemia, which is not politically acceptable in the US.
Watch for a move for some kind of tax on internet transactions at the State level (requiring Congress to lift the exemption): it may be just too tempting in a country running out of “tax-bases with upsides”. Not from Obama, but maybe from some State governors who covet a replacement for sales taxes lost in terms of physical sales. Again, this could be part of a national Sales or Consumption tax platform coupled with lower rates on all else.
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