Obama Calls for Big Tax Hikes, But Lets Bankers off the Hook

The president is not happy with the current fiscal situation. In fact, he sounded angry in his budget message, noting that his spending plan eliminates the Bush tax cuts that "Our Nation could not afford ... when they passed" and cannot afford now. He is also mad at the financial industry and "calls for those in the financial sector -- who benefited so greatly from the extraordinary measures taken to rescue them from a crisis that was largely of their own making to finally recognize their obligation to taxpayers."
In contrast to President George W. Bush, who inherited a record $236 billion surplus in 2000, Obama inherited a record $455 budget deficit in 2008. The cost of the financial bailout and economic recession drove the deficit to a record $1.4 trillion in 2009.

As expected, the president kept his promise to raise taxes on wealthy families and individuals starting next year. First, he will allow the 2001 and 2003 Bush tax cuts to expire as scheduled for families that make at least $250,000 (or individuals who make at least $200,000).
Allowing the tax cuts to expire would return the top two income tax rates to the 39.6 percent and 36 percent rates that existed in 2000. Second, these same families would now pay a 20 percent rather than a 15 percent rate on dividends and capital gains. Finally, the administration seeks to reinstate the personal exemption phase-out that existed before the 2001 tax cut and to limit the rate at which these taxpayers can take itemized deductions to a maximum of 28 percent, rather than at the relevant income tax rate, which would be 36 percent or 39.6 percent.
Another provision that mainly affects the wealthiest taxpayers is the proposal to tax hedge fund and private equity managers on their carried interest, which is their share of profits, at ordinary income rates rather than at the reduced capital gains rates.

All total, these provisions would raise nearly $1 trillion from the wealthiest taxpayers over the next decade.

The president also proposed increasing taxes on multinational corporations, although not by as much as he wanted to last year. At that time, Obama expected to collect $210 billion over ten years by scaling back the tax benefits that allow U.S. multinational corporations to reduce their U.S. tax bill by keeping their earnings offshore. But business opposition prevented the provisions from being enacted. Despite this setback, the president remains determined to scale back the tax benefits granted to offshore earnings and raise $122 billion in the next decade largely through deferring certain interest expense deductions, reforming the foreign income tax credit, and curbing income shifting by disallowing the favorable tax treatment of certain intangibles transferred offshore.

His budget proposes raising $90 billion over ten years by imposing the Financial Crisis Responsibility Fee on many financial institutions that benefitted from the TARP. But, his plan does not call for a tax on the bankers' bonuses that Obama finds so obscene.

The president had seemed determined to go after "fat cat bankers" whose firms are reporting "massive profits and obscene bonuses" because some of these firms "owe their continued existence to the American people," as he said in January when he announced the Financial Crisis Responsibility Fee. But his budget only goes part way to fulfilling this pledge.
While it can be difficult to levy windfall taxes, when the investment bank Goldman Sachs is earning a record $13.4 billion, its CEO Lloyd Blankfein reported about to receive a $100 million bonus, and the firm planning to pay more than $16 billion in compensation and benefits, Obama is leaving a lot of money on the table. What is worse, even companies that lost money are still paying record amounts to their employees. Although it lost $960 million last year, Morgan Stanley managed to pay $14.4 billion in compensation and benefits.

Despite his anger over many of the Bush administration's policies, Obama cannot place all of the blame on his predecessor, as last year Congress gave away billions of dollars in tax breaks to corporations. As the Congressional Budget Office reported, corporate income tax revenues were 30 percent lower in the first quarter of this fiscal year compared with last year due not only to weak corporate profits, but also to "the effects of recent legislation that extended the period over which corporations could apply current-year losses to offset income in previous years." In November, Obama signed the Worker, Homeownership, and Business Assistance Act that generally allows corporate taxpayers with net operating losses in 2008 or 2009 to obtain refunds of taxes paid for five years instead of three years. (corporations that received help through the troubled asset relief program (TARP) are not eligible for this tax break.)

The self-inflicted wounds don't stop there. As the Washington Post reported, the federal government gave Citigroup a tax break that may be worth $38 billion by exempting the company from a provision that under normal tax rules would have disallowed this tax benefit. Another beneficiary of the TARP, GMAC Financial Services, also stands to obtain a $1.7 billion break for the same reason.

Regardless of who is to blame, Congress shows little willingness to go along with Obama's tax increases or his spending cuts. To help the president get around this impasse, he proposes creating a bipartisan 18-member debt commission by executive order that after the November election would send Congress specific recommendations on how to reduce the budget deficit.

When asked whether the federal government could find enough areas to reduce spending and cut the deficit to $700 billion by 2013 without raising taxes, Maya MacGuineas, president of the Committee for a Responsible Federal Budget told Politics Daily, "Not a chance. The budget problem is primarily a spending problem -- that is true. But the problem is so large and politicians are so unwilling to go after the real problems -- entitlement programs -- that there is not a chance we will be able to get the debt back down to a reasonable levels without increasing revenues as well. For any politician who disagrees, please, please show us how."