Obama making the tax code even more complex

So Obama gave his big economic speech and guess what? It's chock-full of the government bureaucracy Democrats are known for

For example, a $3000 tax credit to new jobs within the United States created by small businesses.  Why? Jobs created by big companies are not good enough?  Besides, most companies view jobs are long-term investments.  A short-term $3000 discount is poorly targeted. So, this is essentially a short-term cash infusion into small businesses (which, in a recession, is a good thing).  Why not just give the tax credit without making them jump through bureaucratic hoops documenting hiring and retention?  And why limit it to small businesses?  Simply give a tax credit that is a proportion of the number of employees on payroll ... this way, there is not an incentive for big businesses to fire employees and hire contractors (usually the same people!) from small businesses.

Or no income taxes for seniors making less than $50,000.  Why only seniors?  Because a young family with two young kids making $50,000 is less deserving than retired seniors making the same amount?  Or because Florida is full of seniors whose votes can be bought?  Does this mean that income tax is now dependent on age?  What next, making it dependent on weight? Height? How far you can throw a dead cow?

Or being able to withdraw $10,000 from an IRA with no penalty.  This just complicates the tax code and makes IRAs even more complex.  Why have a tax penalty on withdrawls in the first place?  People pay tax on withdrawal amounts anyway. Isn't that enough?

Or a mortgage tax credit ... This is a great opportunity to rethink the special treatment for mortgage interest.  Why should it be tax-deductible?  That and home-steading only encourages people to buy larger houses than they need or can afford. Besides, home-ownership has the significant disadvantage of reducing labor mobility.  And if long-term US competitiveness is a concern, removing the home mortgage deduction would be a good way to start.

A pragmatic centrist would be taking this opportunity to push for simplification of the tax code.  Not making it more complex and special purpose than it already is.


  1. Here is the actual text of Obama's economic plan:

    Obama's Rescue Plan

    I don't see anything in there that limits the new employee tax credit to small businesses. Tying the credit to the hiring of new employees allows Obama to stay focused on his overall theme of "new jobs=way out of this crisis". Unemployment rates are rising, so it makes sense, economically and politically, to propose ways to increase the number of available jobs. I'm not sure what documentation "hoops" you are referring to for new employees - I should think that normal payroll records which are already sent to the IRS would be sufficient.

    Obama did propose new tax incentives for investing in small businesses. Mostly I think he's engaging in a skillful bit of class warfare, placing himself on the side of the struggling small business owner and McCain on the side of the big corporations. But also consider that small businesses are generally locally-owned. Money invested in them usually stays in the community and re-circulates, rather than lining the pockets and portfolios of big-business corporate officers/large shareholders - the current bogeymen of our economic meltdown. Also, many small businesses, especially start-ups, operate largely on credit for monthly payroll and other expenses, paying off the debt each month when payments come in from their customers/clients. The credit crunch has hit these businesses proportionately harder than the well-established large corporations.

    I'm sure you are correct that electoral college politics is a big part of the reason that Obama's plan calls for reducing income taxes on seniors. But there is also the fact that most senior citizens are living on fixed incomes, with little or no hope of increases. Young couples (and singles) generally have more flexibility in changing jobs, moving to where better jobs are, going back to school, and other ways to advance their careers and earn more over the years. Obama's push to raise the minimum wage also benefits mostly younger workers.

    Tax penalties on early withdrawals from IRAs are there to try and prevent people from robbing their own piggybanks. Having to pay extra taxes tends to make you think twice before raiding your retirement account. That said, there are already exemptions to the penalties for first-time home buyers and educational or medical expenses. Personally, I don't agree with Obama's proposal to exempt up to $10,000 in withdrawals for other reasons. That $10K would be worth substantially more in 20 or 30 years. There must be a better way to help people deal with burdensome mortgages or other household bills.

    I would also disagree with your assertion that the mortgage interest deduction has encouraged people to buy more house than they needed. For decades, prospective home buyers had to have good credit and a substantial down-payment (or mortgage insurance) to qualify for a mortgage. The amount they qualified for was based on strict formulas involving income and debt. The mortgage interest deduction was never a factor in qualifying for a traditional mortgage. The current mortgage crisis is the result of aggressive lenders pushing ARMs and/or balloon loans with ridiculously low early payments (interest-only or even negative-equity) on uninformed buyers (many of whom were high-risk borrowers who should never have been buying at all). Everyone assumed that home values would continue to increase - right up until they didn't.

    There are many ways to be a pragmatist. As a practical matter, unless Obama gets elected, none of his plan will be implemented. For better or worse, owning a home is part of the American dream, and the mortgage interest deduction has helped people fulfill that dream for decades. Proposing an elimination of the deduction would be a quick way for Obama to lose support across the board.

    There are plenty of other provisions in Obama's plan, most of which I agree with. I would be interested in seeing your take on some of those other ideas, as well as your view of McCain's plan, which he presented this morning.

  2. You're right. The employee tax credit is not just for small businesses. I misread the speech because immediately after mentioning the tax credit, he starts talking about investments in small businesses and startups.

    I don't have the mom-and-apple-pie view of small businesses. In my experience, people game the small-business stuff all the time. It's common for large government contractors to create small spin-offs and give them a 51% stake in every government proposal so that they qualify as "small business".

    If senior citizens were not mobile, we wouldn't have Florida at all. Singles and seniors are the most able to pack up and move to a new part of the country.

    I think the mortgage interest deduction is going to be one of the things that we disagree on. I think it artificially keeps house prices up and makes houses larger than they would normally be. Larger houses are less environmentally friendly, so I'm all for getting rid of the mortgage interest deduction.

    Among Obama's ideas that I like:
    (1) the investment in infrastructure
    (2) the clean-energy 10-year national initiative
    (3) modifying terms of mortgages
    (4) allowing bankruptcy judges to reset mortgage rates
    (5) state fiscal tax relief: a good way to jump start from a recession
    (6) the credit guarantees and asset purchases

    Other ideas of his that I don't like:
    (1) extending unemployment benefits. I think it creates some bad incentives. The money could be better used to pay people to do community service.
    (2) mortgage tax credit: making a bad idea worse!

    One of the reasons that I supported Obama was that he was the most centrist of the Democratic lot that ran for president this year. So I'm bound to like more of his ideas than the ones I don't like. But it's never going to be 100%. Oh, well.

    On McCain's plan ... new post on blog!