Budget Dismissed

The unveiling of the Obama administration’s budget this week appeared to be only the opening act for what promises to be a long-running series of episodes involving spending, taxes, and cuts to favored and not-so-favored programs.

Treasury Secretary Timothy Geithner and White House Budget Director Jack Lew took to Capitol Hill on Tuesday to defend the budget proposal that was introduced with so much fanfare on Monday. Geithner explained why the administration did not go into much detail about its plans for corporate tax reform, noting that the administration is continuing its discussions with corporate leaders and hinting he would like some more input from Congress.

However, he did indicate in his testimony about the kinds of percentages that the administration is aiming for, in the high 20s, for the statutory corporate tax rate.

“The average rate of our major trading partners now is in the high 20s and... to make it meaningful you want to get it down substantially toward that level," he said, according to Reuters.

In his prepared testimony, Geithner went into some of the specifics of the tax proposals, noting that it would make the research and experimentation tax credit permanent. The administration also wants to promote clean energy technology by “proposing tax credits for advanced manufacturing facilities, energy-efficient commercial buildings and an improved credit for plug-in vehicles,” according to Geithner.

Other budget proposals would reduce the tax incentives that encourage multinational firms to shift their income and assets to foreign subsidiaries, as well as introduce a fee on financial firms to recoup the costs of the government bailouts.

Republican lawmakers soundly rejected many of the tax increase proposals almost as soon as the budget appeared this week, and indeed they didn’t go very far in the last Congress either, even when Democrats were in control of the House.

Other proposals are a bit different, though. One would limit the value of itemized deductions to 28 percent for high-income households. Geithner called this a “down payment on reform of the individual income tax system.” He claimed that provision alone would generate enough revenue to pay for patching the alternative minimum tax for another three years to prevent it from being expanded to more of the middle class. The budget also calls on Congress to find additional ways to pay for permanent AMT relief, he noted. Good luck with that.

The budget also proposes to reform the taxation of carried interest in financial partnerships, which Geithner noted allows some financial executives to pay tax at lower capital gains tax rates on their compensation. That too is a familiar proposal, which was defeated in the last Congress by lobbyists for private equity and venture capital firms.

The budget proposal also seeks to allow the 2001 and 2003 tax cuts for married couples with household incomes above $250,000, and single filers with incomes above $200,000, to expire, and for the estate tax to return at 2009 levels. Of course, the budget deal that President Obama struck in December with Republican congressional leaders effectively put the kibosh on both of those proposals for another two years, but for fiscal 2012 the administration will try its luck again.

In any case, Republican lawmakers quickly made it known that the administration's proposed budget was dead on arrival. Many Democratic lawmakers were also unhappy with various proposals, such as cuts to home heating assistance programs and community block grants, but they were generally expected to go along with the majority of the proposals.

In the meantime, Republican lawmakers are drawing up budgets of their own, seemingly in a race to see who can claim the most in spending cuts. Talk of a possible government shutdown is also becoming more prevalent, especially if the debt ceiling isn’t raised. Making matters even more dire is the fact that the previous budget was never settled, and is subject to a continuing resolution that requires the two parties to cooperate on at least keeping the federal government running.

With lawmakers trying to make distinctions between controlling short-term deficits vs. long-term deficits, making cuts in discretionary spending vs. cuts in entitlement programs, and trying to keep the economic recovery from stalling, Washington is facing plenty of difficult choices in the months and years ahead. Tax reform is just one element of the mix, but it’s clear that taxes are going to be one of the main levers that the White House will be pushing to try to get the budget deficit somewhat under control. Spending cuts are good in theory, until the people who are losing money from those cuts start to call their lawmakers’ offices.

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