SOTU Offers Little Substance on Taxes

You’ve probably already read three times by now that last night’s State of the Union address was long on rhetoric and short on solutions, or some permutation of that. This is true, of course, and essentially exactly what we should have given the political pageantry we’ve seen from that speech for, well, a long time. Though tax reform in particular could have been addressed more robustly, here are a few tax takeaways from what the President did say:

Cutting corporate taxes – President Obama, correctly noting that the U.S. has one of the highest corporate tax rates in the developed world, proposed a business-spurring tax cut. Good news indeed, if he follows through. Here’s ATR’s Ryan Ellis outlining the main points a presidential tax cut proposal should hit when he, cough, gets around to writing it.

The President is still holding Bowles-Simpson at arm’s length – The corporate tax reduction actually seems to be the only significant tax measure the President supports from his deficit reduction commission’s report. Breaking his previous silence on the issue, he openly admitted during his speech that he didn’t agree “with all their proposals,” such as reducing tax rates for everyone as part of budget reform.

He also didn’t have a word to say about actual tough choices on taxes, like repealing popular income tax deductions that distort the economy and favor certain taxpayers over others. If most Democratic lawmakers adopt the same attitude, it’s almost certain that no real reform will be possible.

“Simplifying the tax code” is a political red herring – The President did, of course, put out a call to simplify the tax code and, to his credit, acknowledge that it’s a “tough job.” But the red flag pops up in the very next sentence when he notes that “members from both parties have expressed an interest in doing this.”

That’s because “simplifying the tax code” sounds good to everyone. Everyone likes to imagine that lawmakers can simply snap their fingers and make the bureaucracy, waste and endless confusion of taxes simply go away. To be sure, there are some bizarre elements of the tax code that can be easily shuffled off. But in reality, a lot of what makes the tax code so expensive is stuff people actually like. This means deductions, credits, exemptions and all that jazz, things that politicians aren’t going to simply wave away when the time comes to get serious. There is a very good economic case to be made that these should be eliminated (Rep. Paul Ryan and Bowles-Simpson have both tackled this), but there’s no way that this issue, once transformed into real actual legislation, will be as simple as some might like to think.