On January 28, the President delivered his State of the Union address to Congress. Included in his top priorities for the coming year are some tax and economic changes designed to create jobs and spur the economy.
Here are his proposals and my reaction to them.
The President’s proposals
- Raising the minimum wage. He’s already raised it to $10.10/hour (up from the basic $7.25/hour) for employees of federal contractors receiving new federal contracts and wants Congress to enact the higher rate for all workers. He believes that a higher minimum wage boosts productivity.
- Creating myRA accounts. These are designed to help middle-class people save automatically for retirement. The accounts would be offered by employers, set up like Roth IRAs, and backed by the full faith and credit of the federal government.
- Extending emergency unemployment benefits. This would add three additional months of unemployment benefits for eligible individuals.
- Expanding the earned income tax credit. He wants it made available to more workers.
- Ending retirement tax breaks for wealthy individuals. He believes that these people get “tens of thousands of dollars more in tax breaks than middle-class families.”
- Expanded gender and sexual orientation/gender identity equality in the workplace. He supports the Paycheck Fairness Act that would strengthen the current Equal Pay Act by protecting women who have babies. And he would add to the list of prohibited discrimination—currently based on race, sex, religion, and disability—sexual orientation and gender identity.
- Launching manufacturing innovation institutes in 2014. These would be designed to accelerate innovation in manufacturing.
- Various energy-related proposals. More fuel efficiency for medium and heavy trucks and setting new energy efficiency standards are just two of these proposals.
- Lowering the corporate rate and repatriating profits. The exact rate at which corporate taxes would be capped and how repatriated profits would be taxed were not specified.
- Small business incentives. The President wants to simplify taxes and expand entrepreneurship education; exactly what this means has not been clarified.
My take on these proposals
Without responding to each proposal separately, overall there is some merit in certain proposals while others don’t make any economic sense to me.
Lowering the top corporate tax rate is a no-brainer, given the fact that the U.S. now has the highest corporate tax rate in the world. This was something that both sides of the aisle agreed as far back as 2008 needed to be done. While there may have been differences of opinion on exactly what that rate should be, virtually no one opposes some rate reduction for corporate taxes.
My problem with a corporate tax rate reduction is the need to simultaneously reduce tax rates on small businesses in which owners of pass-through entities pay tax on their share of business profits on their personal returns. It makes no sense to me to lower the top corporate rate from 35% to say 25% or so while retaining the top individual income tax rate paid by some small business owners of 39.6%. This could be accomplished by providing a special business tax rate that would be used by small business owners in much the same way as there is a special rate for individuals on capital gains and qualified dividends. In my view, this rate reduction would enable small business owners to expand their payrolls and reinvest in equipment, all of which would help the economy.
The proposals on automatic retirement savings for the middle-class sound fine. By making savings easy it likely will help this group increase retirement savings (something I thought was intentioned by the retirement savers credit). Paying for this by taking away retirement savings tax breaks for wealthy individuals doesn’t make sense to me.
First of all, there are already limits in place (modified adjusted gross income limits on making Roth IRA contributions prevent wealthy people from using this tax-free retirement savings break). There are caps on how much can be contributed annually to 401(k) plans and other qualified retirement plans. So the idea of further limiting access to retirement savings incentives seems redundant.
Energy-related proposals may limit carbon emissions. My concerns are the added regulations and costs of compliance for businesses. For example, who doesn’t want more energy-efficient trucks? Businesses save on fuel costs for operating them. But what will the cost of these new vehicles be?
What was missing in any proposal was scaling back on any taxes related to the Affordable Care Act. The bevy of taxes on such things successful individuals, those who choose not to have health coverage, and medical devices should be reexamined in the totality of tax reform. That’s what I’d like to happen.
Overall, the old expressions—the devil is in the details—makes all the difference on whether or not the proposals are worthy of support. We’ll all just have to see!