Skip to main content

Obama budget's tricky balancing act

By Reihan Salam, CNN Contributor
updated 6:28 PM EDT, Wed April 10, 2013
STORY HIGHLIGHTS
  • Reihan Salam: President is casting his budget as one with bipartisan appeal
  • He says Obama still wants to target high income earners for tax increases
  • Parts of the Obama plan will affect middle-income taxpayers, too, he says
  • Salam: Budget shows difficulty of raising revenues without hitting middle class

Editor's note: Reihan Salam, a CNN contributor, is a columnist for Reuters; a writer for the National Review's "The Agenda" blog; a policy adviser for e21, a nonpartisan economic research group; and co-author of "Grand New Party: How Conservatives Can Win the Working Class and Save the American Dream."

(CNN) -- President Obama has characterized his 2014 budget, released Wednesday, not as his ideal vision for how much the federal government ought to tax and spend, but rather as a compromise that aims to respect the priorities of Democrats and Republicans. He has insisted that congressional Republicans see the policy options laid out in his budget as a package deal, not as a menu of policy options from which to choose.

And so the president's budget includes reductions in the planned growth of Social Security and Medicare spending, to appeal to conservative advocates of spending restraint, and a number of tax increases, the bulk of which are designed to affect high-earners, a high priority of the president's congressional allies.

House Speaker John Boehner and other leading congressional Republicans have made their opposition to further tax increases clear. But President Obama's tax proposals nevertheless merit close attention, as they tell us a great deal about his priorities.

One of the ways the Obama administration seeks to raise revenue is to have the federal government adopt chained CPI, a method of calculating consumer price inflation that factors in the fact that consumers tend to substitute some goods for others in response to rising or falling prices.

Chained CPI has been discussed primarily with regards to its impact on federal outlays, and particularly Social Security spending, as it is expected to lead to somewhat lower cost-of-living adjustments that in turn will lead to somewhat lower Social Security benefit levels.

Yet chained CPI will also lead tax brackets to be adjusted more slowly than they are under the federal government's current inflation index. This adjustment is expected to yield roughly $100 billion in new tax revenues over the next decade.

GOP, Dems rail against Obama budget
Uncle Sam eyes tech companies' perks

In addition, the president has revived two proposals that figured prominently in his 2013 budget: the so-called "Buffett Rule," which requires that households earning $1 million or more pay a minimum of 30% of their income in federal taxes, after allowing for charitable giving, and a limit on tax deductions for the highest-earning 2% of households.

The Buffett Rule essentially raises taxes on millionaires who earn long-term capital gains, as Alan Viard of the conservative American Enterprise Institute has explained.

The downside of the Buffett Rule, according to Viard, is that it might discourage capital investment and increase reliance on debt financing. The limit on tax deductions, meanwhile, reduces the value of itemized deductions to the 28% tax rate for households.

That is, even as a household enters the 33, 35, and 39.6% tax brackets, the value of its itemized deductions will remain at the lower 28% rate. The president's budget also calls for substantial increases in federal taxes on tobacco products, which are designed to fund new preschool efforts.

President Obama's tax proposals illustrate how difficult it will be to raise tax revenues by a substantial amount while shielding middle-income households from tax increases. Chained CPI and tax increases on tobacco products will almost certainly affect some number of households earning less than $250,000 a year, yet the Obama administration also intends to increase the size of the Earned Income Tax Credit and the Child Tax Credit, which will tend to mitigate any harmful effect.

Capping the value of itemized deductions will raise a substantial amount of revenue. But it won't do as much as more ambitious proposals to limit individual tax expenditures, like converting tax preferences tied to marginal tax rates to nonrefundable tax credits. This approach, however, also runs into political pitfalls, as it will raise taxes on at least some middle-income households, even as it reduces them for large numbers of low- and middle-income non-itemizers.

If President Obama hopes to build momentum for a substantial revenue increase, he would be well advised to cheer on the efforts of Sen. Max Baucus, D-Montana, and Rep. Dave Camp, R-Michigan, the chairmen of the tax-writing committees of the Senate and House respectively, as both are working toward a larger, more ambitious tax overhaul.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



Though Camp and his Republican allies are resistant to tax increases, they might prove more amenable if comprehensive tax reform results in lower rates. Back in 2011, for example, the center-left Progressive Policy Institute released its "Modified Zero Plan," which eliminated all tax expenditures but the Earned Income Tax Credit and the Child Tax Credit and lowered rates to 12, 22, and 28%.

Despite these substantially lower rates, revenues would increase, in part because capital income would be subject to the same tax rates as ordinary income. Of course, measures like the Buffett Rule would increase effective taxes on capital income even further. If Baucus and Camp converge around something like the Modified Zero Plan, the tax debate might finally break out of its current grim stalemate.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Reihan Salam.

ADVERTISEMENT
Part of complete coverage on
updated 7:22 PM EDT, Fri September 19, 2014
Is ballet dying? CNN spoke with Isabella Boylston, a principal dancer at the American Ballet Theatre, about the future of the art form.
updated 5:47 PM EDT, Fri September 19, 2014
Sally Kohn says it's time we take climate change as seriously as we do warfare in the Middle East
updated 9:02 AM EDT, Fri September 19, 2014
Dean Obeidallah says an Oklahoma state representative's hateful remarks were rightfully condemned by religious leaders..
updated 3:22 PM EDT, Fri September 19, 2014
No matter how much planning has gone into U.S. military plans to counter the Islamic State in Iraq and Syria, the Arab public isn't convinced that anything will change, says Geneive Abdo
updated 11:44 AM EDT, Fri September 19, 2014
President Obama's strategy for destroying ISIS seems to depend on a volley of air strikes. That won't be enough, says Haider Mullick.
updated 9:03 AM EDT, Fri September 19, 2014
Paul Begala says Hillary Clinton has plenty of good reasons not to jump into the 2016 race now
updated 11:01 AM EDT, Fri September 19, 2014
Scotland decided to trust its 16-year-olds to vote in the biggest question in its history. Americans, in contrast, don't even trust theirs to help pick the county sheriff. Who's right?
updated 9:57 PM EDT, Thu September 18, 2014
Ruben Navarrette says spanking is an acceptable form of disciplining a child, as long as you follow the rules.
updated 11:47 AM EDT, Fri September 19, 2014
Frida Ghitis says the foiled Australian plot shows ISIS is working diligently to taunt the U.S. and its allies.
updated 3:58 PM EDT, Fri September 19, 2014
Young U.S. voters by and large just do not see the midterm elections offering legitimate choices because, in their eyes, Congress has proven to be largely ineffectual, and worse uncaring, argues John Della Volpe
updated 9:58 PM EDT, Thu September 18, 2014
Steven Holmes says spanking, a practice that is ingrained in our culture, accomplishes nothing positive and causes harm.
updated 2:31 PM EDT, Thu September 18, 2014
Sally Kohn says America tried "Cowboy Adventurism" as a foreign policy strategy; it failed. So why try it again?
updated 10:27 AM EDT, Thu September 18, 2014
Van Jones says the video of John Crawford III, who was shot by a police officer in Walmart, should be released.
updated 10:48 AM EDT, Thu September 18, 2014
NASA will need to embrace new entrants and promote a lot more competition in future, argues Newt Gingrich.
updated 7:15 PM EDT, Tue September 16, 2014
If U.S. wants to see real change in Iraq and Syria, it will have to empower moderate forces, says Fouad Siniora.
updated 8:34 PM EDT, Wed September 17, 2014
Mark O'Mara says there are basic rules to follow when interacting with law enforcement: respect their authority.
updated 9:05 AM EDT, Tue September 16, 2014
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
updated 7:49 AM EDT, Tue September 16, 2014
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
updated 1:23 PM EDT, Mon September 15, 2014
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT