View PDF of Article in Tax New & Comment — October 2012
HISTORIC CHANGES IN TAX LAW APPEAR IMMINENT — OCTOBER 2012
Barring a significant change in voter sentiment in Ohio, and to a lesser extent in Florida and Virginia, President Obama, despite his lackluster performance in the first debate, and despite being burdened with an unusually high rate of unemployment for an incumbent seeking reelection, appears to be a heavy odds-on favorite to capture the 270 electoral votes necessary to win. Nevertheless, should the popular vote contest tighten, the odds could change. The Bush tax cuts are scheduled to expire on December 31, 2012. Although scheduled to expire, not all of the Bush tax appear fated for extinction: Some will likely survive, regardless of who wins the election. Fewer Bush tax cuts will survive if Mr. Obama wins reelection, and those that do will likely survive in attenuated form. Congress appears likely to remain split, with the House remaining solidly Republican; however, especially given the Akin debacle in Arkansas, the Democrats appear likely to add to their slim majority in the Senate.
Ordinary Income
Mr. Obama supports extending the ordinary income component of the Bush tax cuts for families whose income does not exceed $250,000. (Versus, for example, the dividend and capital gains components of the Bush tax cuts which Mr. Obama has indicated that he would allow to expire.) If the Bush tax cuts expire with respect to ordinary income, tax rates on earned income will increase to levels not seen since 2002. As of January 1, 2013, ordinary income will be taxed by Washington at a maximum rate of 39.6 percent, with an additional 3.8 Medicare surtax for some taxpayers with passive income. Thus, the top federal income tax rate for ordinary income will jump to 43.4 percent on income earned in the active conduct of a trade or business, or salary income. New York State residents will be harder hit if the Bush tax cuts expire: New Yorkers are subject to state income tax of up to 8.97 percent, and New York City residents with must pay an additional income tax of up to 3.87 percent. This means that New York residents not subject to the Medicare surtax could face a top income tax rate of 48.57 percent on active business or salary income; and those in New York City of up to 52.44 percent.
Income Tax Proposals of Governor Romney
Mr. Romney supports (i) the permanent extension all of the Bush tax cuts now scheduled to expire in 2013; (ii) the repeal of the 2010 health reform legislation (but is in favor of leaving health care legislation to individual states); (iii) the reduction in individual income tax rates by 20 percent, so that the top rate would fall from 35 percent to 28 percent; (iv) the reduction of the corporate tax rate to 25 percent and the passage of legislation making the research and experimentation credit permanent; (v) the permanent repeal of the 3.8 percent Medicare tax imposed by the 2010 health care legislation; (vi) the reduction of dividend and capital gains taxes on families with incomes below $200,000.
Mr. Romney states that revenue losses occasioned by these reductions in taxes would be recouped by reducing or eliminating certain tax entitlements. Mr. Obama has taken issue with Mr. Romney’s pledge to cut taxes and reduce the deficit, remarking that “I guess my opponent has a plan, but there’s one thing missing from it: arithmetic. They couldn’t answer the question of how you have deficits, you add five trillion dollars in new tax cuts, two trillion dollars in new defense spending and somehow you’re going to close the deficit without raising taxes on the middle class families.” Mr. Romney also favors repealing the corporate AMT. The Obama administration advanced a proposal earlier in the year that would restrict the application of AMT to taxpayers whose adjusted gross income exceeded $1 million.
Medicare Surtax
To cover the costs of federal health care legislation, as of January 1, 2013, some individuals, trusts and estates will become subject to a “Medicare surtax” of 3.8 percent. The tax will be applied to the lesser of (i) net investment income or (ii) the amount by which “modified” AGI exceeds the “threshold amount.”” The threshold amount is $200,000 for single filers and $250,000 for joint filers. Net investment income includes, inter alia, interest, dividends and net capital gains. Modified AGI does not include (i) active trade or business income; (ii) distributions from IRAs or qualified retirement plans; or (iii) gain excluded from the sale of a personal residence under IRC §121.
Capital Gains
After December 31, the rate of tax imposed on long term capital gains will increase by a third, from its current rate of 15 percent to between 20 and 23.8 percent, depending on whether the taxpayer is subject to the new Medicare surtax on long term capital gains. In perspective, the long term rate at 23.8 percent will remain in the lower to middle end of the historical spectrum. It is not entirely clear where whether Mr. Obama would be content with merely permitting the Bush tax cut on capital gains to expire; he has not indicated otherwise. Perhaps Mr. Obama will seek counsel from Mr. Clinton on this issue. In 1997, Mr. Clinton signed legislation reducing the capital gains tax rate from 29 percent to 21 percent. Following the passage of that legislation, economic growth rose from an average of 3.1 percent to 4.5 percent per year. Mr. Clinton warned of the dangers posed by the abrupt termination of the Bush tax cuts in a interview candid with Maria Bartiromo of CNBC in June. Mr. Clinton stated that the country “can’t have a balanced budget unless there is growth” and stressed the importance of “find[ing] a way to keep the expansion going . . . Find[ing] some way to avoid the fiscal cliff, to avoid anything that would contract the economy.” Mr. Clinton expressed the view that the Bush tax cuts should be extended until at least the beginning of 2013.
Health Care Legislation
Governor Romney argues that the federal health care legislation enacted by President Obama should be repealed. However, this seems unlikely since, as noted by Mr. Obama in the first Presidential debate, repeal would require Congressional approval which, at least now, appears doubtful. Mr. Romney’s stated desire to repeal “Obamacare” also seems a touch disingenuous, since Mr. Romney, when Governor of Massachusetts, introduced legislation mandating that nearly every Massachusetts resident obtain a minimum level of health care insurance coverage and provided free health care insurance for residents earning less than 150 percent of the federal poverty level.
Dividends and Interest
As of January 1, 2013, dividends will lose their favorable 15 percent tax rate, which they now share with long term capital gains, and will again become taxed as ordinary income. Coupled with a new top ordinary income tax rate of 43.4 percent (including the Medicare surtax), the tax imposed on dividends will increase by an astounding 189 percent. New York City residents would pay an additional tax of 3.8 percent on their income.
The tax effect of such an increase could be felt on Wall Street. While high dividend paying stocks have a superior track record to low-dividend paying growth stocks over the long term, their current sheen could lose some lustre. Adversely affected could be high-dividend stocks in the telecom, drug, and tobacco sectors. Conversely, technology, materials and airline sectors could benefit, at least in relative terms. The astronomical increase in federal income tax could actually cause an exodus from New York of wealthy residents who derive most of their income from passive income sources such as dividends, since their federal and state tax rate would increase from 15 percent to 52.37 percent living outside of New York City, and to 56.24 percent for those living in the five boroughs. (New York also imposes an estate tax on residents of up to 16 percent on large estates. The estate tax exclusion in New York is $1 million.)
Corporate Taxes
Both President Obama and Governor Romney would reduce the corporate income tax, which at 35 percent, is among the highest in the world. Mr. Obama disapproves of what he characterizes as “loopholes” which permit corporations to significantly reduce tax liability. In return for eliminating these tax provisions, Mr. Obama has advanced the proposition that the corporate tax rate should be reduced from its current rate of 35 percent, which is among the highest, if not the highest, in the world.
Mr. Romney and Mr. Obama’s
Views on Gift and Estate Taxes
If Congress does not act, significant changes to the gift and estate tax laws will also occur on January 1st, 2013. Most significantly, the unified credit will be decimated: The current $5 million exemption amount will revert to $1 million. Astute wealthy taxpayers who are benevolently inclined may consider making use of the $5 million gift tax exemption during the remainder of 2012. Although making use of the $5 million exemption in 2012 appears to carry with it little tax risk, there is a chance that if the exemption amount is reduced $3.5 million or less, Congress could seek to “recapture” the tax benefit previously conferred on those making $5 million gifts today. However, it seems more likely that the tax benefit of those perspicacious enough to utilize the $5 million exemption in 2012 will be grandfathered, even if the $5 million amount is reduced in future years.
Perhaps the difference in tax philosophies between Mr. Obama and Mr. Romney is most poignantly illustrated in the two candidates’ differing views with respect to the estate tax. While one would presume that Mr. Obama would support a return to the $3.5 million gift and estate tax exemption of 2011 — and not seek a lower threshold, Mr. Romney staunchly advocates eliminating transfer taxes entirely. Whether Mr. Romney could repeal the estate tax if elected President is another matter, as passage of a bill to repeal would be required by both the House and the Senate. Unless both houses of Congress were controlled by Republicans, it is doubtful that Mr. Romney could accomplish what neither President Reagan or President Bush could in this regard.
Nevertheless, the trend in estate tax, at least at the federal level, has been toward its diminution. The unified credit, now $5 million, can be shared by a married couple, effectively making the exemption amount no less than $10 million for a married couple. At some point, a reduced tax rate and an elevated exemption amount would cause the Treasury to expend such a high proportion of tax revenues in administering the tax as to diminish the practicality of the tax. In spite of its recent downward trend, the current estate tax rate is scheduled to increase 55 percent in January when EGTRRA (i.e., the Bush tax cuts) sunsets, and the exemption amount will return to $1 million, unless new legislation is passed. There is no indication that if reelected, President Obama would oppose legislation reestablishing the $3.5 million exemption amount, nothing is written in stone. No one expected the estate tax to expire in 2012. Therefore, for the present time at least, gift and estate tax planning appears prudent, if not necessary.
Report on Mr. Obama’s First Term
Mr. Clinton argued eloquently at the Democratic National Convention that given the state of the economy when President Obama took office, “no president” could have cured the nation’s economic ills. This new found respect by Mr. Clinton for the President’s economic policies may be genuine, but it also clearly reflects a healthy dose of partisanship. In truth, it cannot fairly be said that Mr. Obama’s tax and economic policies have been more than an extremely modest success. The economy is improving at a glacial rate and even the positive momentum of earlier this year has dissipated. Conversely, Wall Street has prospered under the Obama administration. Some credit for this should be given to the fiscal stewardship of the Federal Reserve, led by Chairman Bernanke. Credit for low interest rates (and the propping up of securities) should also be given to China, which has made a large bet on the U.S. economy. China now holds $1.2 trillion in promissory notes of the United States.
What Mr. Obama would seek to accomplish in his second term with respect to tax policy is unclear. However, it is quite clear that the President is resolute in his determination to prevent wealthy taxpayers with large amounts of investment income from being taxed at lower effective rates than the majority of taxpayers. Recent increases in the President’s approval rating seem to suggest that Americans agree that taxpayers with large amounts of investment income should be taxed at higher marginal tax rates. If elected to a second term, Mr. Obama will likely seek to further his political philosophy that Americans should all share in national prosperity. At the same time, perhaps Mr. Obama will take a lesson from former Presidents Reagan and Clinton who both, though from entirely different political perspectives, realized that recent experience seems to demonstrate that lower income taxes tend to promote rather than impede economic growth.
Nevertheless, much of the criticism of the President’s economic and tax policies is unfair. President Obama did not oppose extending the Bush Tax cuts in 2010. Marginal income tax rates remain much more compressed now than they were even under President Eisenhower. Viewed in a historical perspective, income tax rates are at the lower end of progressivity. Economic growth, though anemic, is at least not spiraling downward as it was when President Bush left office.
* * *
Upcoming Presidential Election Viewed In Historical Perspective
If Mr. Obama has not succeeded on the domestic front, it seems that his principal fault in this regard has been his inability to work with Congress in achieving a consensus in finding legislative solutions to pressing tax, economic, energy, health and environmental issues. The federal system cannot function properly unless the President and Congress work effectively together. The Senate has been controlled by Democrats during Mr. Obama’s entire term, and the House for the first two years of his term. While part of the blame for the failure of Congress and the President to cooperate rests with the House of Representatives and, to a lesser extent, with the Senate, the President bears a good measure of responsibility. Perhaps that is why Mr. Clinton has been surprisingly candid in his critique of the economic policies of the Obama Administration.
Previous administrations were able to cooperate with Congress and accomplish laudable tax and non-tax goals. The last two budgets of President Reagan were passed by a Democratic Congress. During most of both terms of President George W. Bush, the Senate was split and the House was Democratic. Even President Nixon, whose Presidency was marred by his resignation following serious wrongdoing, made historic advances in foreign policy, civil rights, social welfare, and environmental issues at a time when both houses of Congress were controlled by Democrats. Americans infrequently deny an incumbent president a second term. President Carter’s quest for a second term was dashed by double-digit inflation, recession, the energy crisis, the Iranian hostage crisis, Three Mile Island, and perhaps Americans’ displeasure with his pessimism and officiousness. Americans also failed to reelect President George H.W. Bush in 1992 at a time when the unemployment rate was 7.8 percent and the economy had entered into a mild recession.
The case for the reelection for Mr. Obama most parallels that of the elder Mr. Bush. Perhaps Mr. Obama will benefit from facing a Republican candidate who, though actually not as conservative as President Reagan, has been unable to capture the support of as broad a spectrum of the middle electorate as was Mr. Reagan. Perhaps Mr. Romney moved so far to the right to win the Republican nomination that his moderate political philosophy has been obscured. Yet it must be noted that Mr. Romney appeared quite moderate in the first Presidential debate. Mr. Obama is also not facing a candidate as charismatic as Mr. Clinton, as was the elder President Bush, who made no secret of his preference for foreign policy, and seemed to genuinely disdain involvement in domestic affairs. Americans also seem to like Mr. Obama, even if they are not pleased with his performance. Few doubt his intellect, integrity, or compassion, all important qualities for a President. Mr. Romney may have made the contest a horse race after his stellar performance at the first debate, as he appeared in command of the issues, and demonstrated a decidedly Presidential mien. Still, one swallow does not a summer make, and Mr. Obama will no doubt improve off his dull performance in the initial debate.
Since assuming the Presidency, Mr. Obama, to his credit, has become more moderate in his views, especially with respect to foreign policy. The gulf between the views of Mr. Romney and Mr. Obama in matters of foreign policy appear less wide than with respect to domestic issues. Mr. Obama seems to recognize, if belatedly, the importance of maintaining strong relations with close allies such as Britain, France, Germany, Israel and Japan. Mr. Romney, on the other hand, has never left any doubt of his firm commitment to the nation’s allies, especially Israel. With respect to matters involving federal taxation, if reelected, President Obama may realize that raising income taxes to stratospheric levels could do more harm than good, and that an attempt to redistribute the nation’s wealth through taxation could prove neither practical nor effective. Mr. Obama may realize that this fiscal conclusion, shared even by prominent Democrats such as Mr. Clinton, is worth examining when implementing federal tax policy, and that his failure to impose new federal income taxes would not necessarily conflict with the President’s commitment to increasing the wealth of less affluent Americans.
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Law Offices of David L. Silverman 
Historic Changes in Tax Law Appear Imminent — October 2012
View PDF of Article in Tax New & Comment — October 2012
HISTORIC CHANGES IN TAX LAW APPEAR IMMINENT — OCTOBER 2012
Barring a significant change in voter sentiment in Ohio, and to a lesser extent in Florida and Virginia, President Obama, despite his lackluster performance in the first debate, and despite being burdened with an unusually high rate of unemployment for an incumbent seeking reelection, appears to be a heavy odds-on favorite to capture the 270 electoral votes necessary to win. Nevertheless, should the popular vote contest tighten, the odds could change. The Bush tax cuts are scheduled to expire on December 31, 2012. Although scheduled to expire, not all of the Bush tax appear fated for extinction: Some will likely survive, regardless of who wins the election. Fewer Bush tax cuts will survive if Mr. Obama wins reelection, and those that do will likely survive in attenuated form. Congress appears likely to remain split, with the House remaining solidly Republican; however, especially given the Akin debacle in Arkansas, the Democrats appear likely to add to their slim majority in the Senate.
Ordinary Income
Mr. Obama supports extending the ordinary income component of the Bush tax cuts for families whose income does not exceed $250,000. (Versus, for example, the dividend and capital gains components of the Bush tax cuts which Mr. Obama has indicated that he would allow to expire.) If the Bush tax cuts expire with respect to ordinary income, tax rates on earned income will increase to levels not seen since 2002. As of January 1, 2013, ordinary income will be taxed by Washington at a maximum rate of 39.6 percent, with an additional 3.8 Medicare surtax for some taxpayers with passive income. Thus, the top federal income tax rate for ordinary income will jump to 43.4 percent on income earned in the active conduct of a trade or business, or salary income. New York State residents will be harder hit if the Bush tax cuts expire: New Yorkers are subject to state income tax of up to 8.97 percent, and New York City residents with must pay an additional income tax of up to 3.87 percent. This means that New York residents not subject to the Medicare surtax could face a top income tax rate of 48.57 percent on active business or salary income; and those in New York City of up to 52.44 percent.
Income Tax Proposals of Governor Romney
Mr. Romney supports (i) the permanent extension all of the Bush tax cuts now scheduled to expire in 2013; (ii) the repeal of the 2010 health reform legislation (but is in favor of leaving health care legislation to individual states); (iii) the reduction in individual income tax rates by 20 percent, so that the top rate would fall from 35 percent to 28 percent; (iv) the reduction of the corporate tax rate to 25 percent and the passage of legislation making the research and experimentation credit permanent; (v) the permanent repeal of the 3.8 percent Medicare tax imposed by the 2010 health care legislation; (vi) the reduction of dividend and capital gains taxes on families with incomes below $200,000.
Mr. Romney states that revenue losses occasioned by these reductions in taxes would be recouped by reducing or eliminating certain tax entitlements. Mr. Obama has taken issue with Mr. Romney’s pledge to cut taxes and reduce the deficit, remarking that “I guess my opponent has a plan, but there’s one thing missing from it: arithmetic. They couldn’t answer the question of how you have deficits, you add five trillion dollars in new tax cuts, two trillion dollars in new defense spending and somehow you’re going to close the deficit without raising taxes on the middle class families.” Mr. Romney also favors repealing the corporate AMT. The Obama administration advanced a proposal earlier in the year that would restrict the application of AMT to taxpayers whose adjusted gross income exceeded $1 million.
Medicare Surtax
To cover the costs of federal health care legislation, as of January 1, 2013, some individuals, trusts and estates will become subject to a “Medicare surtax” of 3.8 percent. The tax will be applied to the lesser of (i) net investment income or (ii) the amount by which “modified” AGI exceeds the “threshold amount.”” The threshold amount is $200,000 for single filers and $250,000 for joint filers. Net investment income includes, inter alia, interest, dividends and net capital gains. Modified AGI does not include (i) active trade or business income; (ii) distributions from IRAs or qualified retirement plans; or (iii) gain excluded from the sale of a personal residence under IRC §121.
Capital Gains
After December 31, the rate of tax imposed on long term capital gains will increase by a third, from its current rate of 15 percent to between 20 and 23.8 percent, depending on whether the taxpayer is subject to the new Medicare surtax on long term capital gains. In perspective, the long term rate at 23.8 percent will remain in the lower to middle end of the historical spectrum. It is not entirely clear where whether Mr. Obama would be content with merely permitting the Bush tax cut on capital gains to expire; he has not indicated otherwise. Perhaps Mr. Obama will seek counsel from Mr. Clinton on this issue. In 1997, Mr. Clinton signed legislation reducing the capital gains tax rate from 29 percent to 21 percent. Following the passage of that legislation, economic growth rose from an average of 3.1 percent to 4.5 percent per year. Mr. Clinton warned of the dangers posed by the abrupt termination of the Bush tax cuts in a interview candid with Maria Bartiromo of CNBC in June. Mr. Clinton stated that the country “can’t have a balanced budget unless there is growth” and stressed the importance of “find[ing] a way to keep the expansion going . . . Find[ing] some way to avoid the fiscal cliff, to avoid anything that would contract the economy.” Mr. Clinton expressed the view that the Bush tax cuts should be extended until at least the beginning of 2013.
Health Care Legislation
Governor Romney argues that the federal health care legislation enacted by President Obama should be repealed. However, this seems unlikely since, as noted by Mr. Obama in the first Presidential debate, repeal would require Congressional approval which, at least now, appears doubtful. Mr. Romney’s stated desire to repeal “Obamacare” also seems a touch disingenuous, since Mr. Romney, when Governor of Massachusetts, introduced legislation mandating that nearly every Massachusetts resident obtain a minimum level of health care insurance coverage and provided free health care insurance for residents earning less than 150 percent of the federal poverty level.
Dividends and Interest
As of January 1, 2013, dividends will lose their favorable 15 percent tax rate, which they now share with long term capital gains, and will again become taxed as ordinary income. Coupled with a new top ordinary income tax rate of 43.4 percent (including the Medicare surtax), the tax imposed on dividends will increase by an astounding 189 percent. New York City residents would pay an additional tax of 3.8 percent on their income.
The tax effect of such an increase could be felt on Wall Street. While high dividend paying stocks have a superior track record to low-dividend paying growth stocks over the long term, their current sheen could lose some lustre. Adversely affected could be high-dividend stocks in the telecom, drug, and tobacco sectors. Conversely, technology, materials and airline sectors could benefit, at least in relative terms. The astronomical increase in federal income tax could actually cause an exodus from New York of wealthy residents who derive most of their income from passive income sources such as dividends, since their federal and state tax rate would increase from 15 percent to 52.37 percent living outside of New York City, and to 56.24 percent for those living in the five boroughs. (New York also imposes an estate tax on residents of up to 16 percent on large estates. The estate tax exclusion in New York is $1 million.)
Corporate Taxes
Both President Obama and Governor Romney would reduce the corporate income tax, which at 35 percent, is among the highest in the world. Mr. Obama disapproves of what he characterizes as “loopholes” which permit corporations to significantly reduce tax liability. In return for eliminating these tax provisions, Mr. Obama has advanced the proposition that the corporate tax rate should be reduced from its current rate of 35 percent, which is among the highest, if not the highest, in the world.
Mr. Romney and Mr. Obama’s
Views on Gift and Estate Taxes
If Congress does not act, significant changes to the gift and estate tax laws will also occur on January 1st, 2013. Most significantly, the unified credit will be decimated: The current $5 million exemption amount will revert to $1 million. Astute wealthy taxpayers who are benevolently inclined may consider making use of the $5 million gift tax exemption during the remainder of 2012. Although making use of the $5 million exemption in 2012 appears to carry with it little tax risk, there is a chance that if the exemption amount is reduced $3.5 million or less, Congress could seek to “recapture” the tax benefit previously conferred on those making $5 million gifts today. However, it seems more likely that the tax benefit of those perspicacious enough to utilize the $5 million exemption in 2012 will be grandfathered, even if the $5 million amount is reduced in future years.
Perhaps the difference in tax philosophies between Mr. Obama and Mr. Romney is most poignantly illustrated in the two candidates’ differing views with respect to the estate tax. While one would presume that Mr. Obama would support a return to the $3.5 million gift and estate tax exemption of 2011 — and not seek a lower threshold, Mr. Romney staunchly advocates eliminating transfer taxes entirely. Whether Mr. Romney could repeal the estate tax if elected President is another matter, as passage of a bill to repeal would be required by both the House and the Senate. Unless both houses of Congress were controlled by Republicans, it is doubtful that Mr. Romney could accomplish what neither President Reagan or President Bush could in this regard.
Nevertheless, the trend in estate tax, at least at the federal level, has been toward its diminution. The unified credit, now $5 million, can be shared by a married couple, effectively making the exemption amount no less than $10 million for a married couple. At some point, a reduced tax rate and an elevated exemption amount would cause the Treasury to expend such a high proportion of tax revenues in administering the tax as to diminish the practicality of the tax. In spite of its recent downward trend, the current estate tax rate is scheduled to increase 55 percent in January when EGTRRA (i.e., the Bush tax cuts) sunsets, and the exemption amount will return to $1 million, unless new legislation is passed. There is no indication that if reelected, President Obama would oppose legislation reestablishing the $3.5 million exemption amount, nothing is written in stone. No one expected the estate tax to expire in 2012. Therefore, for the present time at least, gift and estate tax planning appears prudent, if not necessary.
Report on Mr. Obama’s First Term
Mr. Clinton argued eloquently at the Democratic National Convention that given the state of the economy when President Obama took office, “no president” could have cured the nation’s economic ills. This new found respect by Mr. Clinton for the President’s economic policies may be genuine, but it also clearly reflects a healthy dose of partisanship. In truth, it cannot fairly be said that Mr. Obama’s tax and economic policies have been more than an extremely modest success. The economy is improving at a glacial rate and even the positive momentum of earlier this year has dissipated. Conversely, Wall Street has prospered under the Obama administration. Some credit for this should be given to the fiscal stewardship of the Federal Reserve, led by Chairman Bernanke. Credit for low interest rates (and the propping up of securities) should also be given to China, which has made a large bet on the U.S. economy. China now holds $1.2 trillion in promissory notes of the United States.
What Mr. Obama would seek to accomplish in his second term with respect to tax policy is unclear. However, it is quite clear that the President is resolute in his determination to prevent wealthy taxpayers with large amounts of investment income from being taxed at lower effective rates than the majority of taxpayers. Recent increases in the President’s approval rating seem to suggest that Americans agree that taxpayers with large amounts of investment income should be taxed at higher marginal tax rates. If elected to a second term, Mr. Obama will likely seek to further his political philosophy that Americans should all share in national prosperity. At the same time, perhaps Mr. Obama will take a lesson from former Presidents Reagan and Clinton who both, though from entirely different political perspectives, realized that recent experience seems to demonstrate that lower income taxes tend to promote rather than impede economic growth.
Nevertheless, much of the criticism of the President’s economic and tax policies is unfair. President Obama did not oppose extending the Bush Tax cuts in 2010. Marginal income tax rates remain much more compressed now than they were even under President Eisenhower. Viewed in a historical perspective, income tax rates are at the lower end of progressivity. Economic growth, though anemic, is at least not spiraling downward as it was when President Bush left office.
* * *
Upcoming Presidential Election Viewed In Historical Perspective
If Mr. Obama has not succeeded on the domestic front, it seems that his principal fault in this regard has been his inability to work with Congress in achieving a consensus in finding legislative solutions to pressing tax, economic, energy, health and environmental issues. The federal system cannot function properly unless the President and Congress work effectively together. The Senate has been controlled by Democrats during Mr. Obama’s entire term, and the House for the first two years of his term. While part of the blame for the failure of Congress and the President to cooperate rests with the House of Representatives and, to a lesser extent, with the Senate, the President bears a good measure of responsibility. Perhaps that is why Mr. Clinton has been surprisingly candid in his critique of the economic policies of the Obama Administration.
Previous administrations were able to cooperate with Congress and accomplish laudable tax and non-tax goals. The last two budgets of President Reagan were passed by a Democratic Congress. During most of both terms of President George W. Bush, the Senate was split and the House was Democratic. Even President Nixon, whose Presidency was marred by his resignation following serious wrongdoing, made historic advances in foreign policy, civil rights, social welfare, and environmental issues at a time when both houses of Congress were controlled by Democrats. Americans infrequently deny an incumbent president a second term. President Carter’s quest for a second term was dashed by double-digit inflation, recession, the energy crisis, the Iranian hostage crisis, Three Mile Island, and perhaps Americans’ displeasure with his pessimism and officiousness. Americans also failed to reelect President George H.W. Bush in 1992 at a time when the unemployment rate was 7.8 percent and the economy had entered into a mild recession.
The case for the reelection for Mr. Obama most parallels that of the elder Mr. Bush. Perhaps Mr. Obama will benefit from facing a Republican candidate who, though actually not as conservative as President Reagan, has been unable to capture the support of as broad a spectrum of the middle electorate as was Mr. Reagan. Perhaps Mr. Romney moved so far to the right to win the Republican nomination that his moderate political philosophy has been obscured. Yet it must be noted that Mr. Romney appeared quite moderate in the first Presidential debate. Mr. Obama is also not facing a candidate as charismatic as Mr. Clinton, as was the elder President Bush, who made no secret of his preference for foreign policy, and seemed to genuinely disdain involvement in domestic affairs. Americans also seem to like Mr. Obama, even if they are not pleased with his performance. Few doubt his intellect, integrity, or compassion, all important qualities for a President. Mr. Romney may have made the contest a horse race after his stellar performance at the first debate, as he appeared in command of the issues, and demonstrated a decidedly Presidential mien. Still, one swallow does not a summer make, and Mr. Obama will no doubt improve off his dull performance in the initial debate.
Since assuming the Presidency, Mr. Obama, to his credit, has become more moderate in his views, especially with respect to foreign policy. The gulf between the views of Mr. Romney and Mr. Obama in matters of foreign policy appear less wide than with respect to domestic issues. Mr. Obama seems to recognize, if belatedly, the importance of maintaining strong relations with close allies such as Britain, France, Germany, Israel and Japan. Mr. Romney, on the other hand, has never left any doubt of his firm commitment to the nation’s allies, especially Israel. With respect to matters involving federal taxation, if reelected, President Obama may realize that raising income taxes to stratospheric levels could do more harm than good, and that an attempt to redistribute the nation’s wealth through taxation could prove neither practical nor effective. Mr. Obama may realize that this fiscal conclusion, shared even by prominent Democrats such as Mr. Clinton, is worth examining when implementing federal tax policy, and that his failure to impose new federal income taxes would not necessarily conflict with the President’s commitment to increasing the wealth of less affluent Americans.
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