News Release: Events, Faculty Experts, Finance and Economics, Law, Politics

Nov. 14,  2008

Q&A: Understanding the Implications of Barack Obama's Tax Policy

From Knowledge@Emory

As U.S. President-Elect Barack Obama prepares to take over the White House in a few short weeks, America’s economic situation continues to worsen. With unemployment on the rise and the bank bailout still on the front burner, there is much debate over the best way that taxes should be (or not be) used to jumpstart the economy. Knowledge@Emory recently sat down with Professor Dorothy A. Brown from Emory University's School of Law to discuss the implications of President-Elect Obama’s tax plan and what it might mean for the country. Professor Brown specializes in federal tax law, corporate tax matters, tax policy, and critical race theory.

Knowledge@Emory: There has always been disagreement over the best way to use federal taxes to ignite the economy. President-Elect Obama has noted that the financial health of America’s middle class is critical to the U.S. economic recovery, and that’s why he has chosen to focus his tax credit strategy on that group. Just how true is that statement?

Brown: I think that’s absolutely true. We recently heard that Circuit City has filed for bankruptcy protection, Starbucks is closing 600 stores, and consumer spending is down. My guess is we’re looking at potentially one of the worst holiday seasons that retailers have ever faced. The middle class are nervous and keeping their money in their pockets. The theory is with more money to spend, the middle class could provide some of the fuel needed to re-start the economy. The last eight years of tax cuts for the wealthy have shown that trickle down economics has not worked.

Knowledge@Emory: President-Elect Obama’s plan calls for a tax cut for 95% of workers and their families. This “Making Work Pay” tax credit would provide a refundable tax cut of $500 for workers or $1,000 for working couples. He also has proposed other cuts and credits for lower and middle-income individuals, including a college tuition credit, additional mortgage interest and child-care tax credits on top of those that already exist for those that qualify, and health care and retirement savings credits. Do these credits directly benefit the economy (as a whole), or are they simply a necessary quick fix? Many would argue that these sorts of credits do not have a stimulus effect.

Brown: That’s an empirical question really. What will people do with the extra money? The studies that I’ve seen suggest that low and middle-income taxpayers are more likely to spend than higher income taxpayers. Low and middle-income taxpayers engage in discretionary spending less than higher income taxpayers. Therefore, they are more likely to spend the rebate money received.

Knowledge@Emory: His plan also includes a proposed repeal of a portion of the Bush tax cuts for families earning over $250,000. Specifically, President-Elect Obama’s policy statement notes that their “tax rate would remain at or below where they were in the 1990s,” and that the “top two income tax brackets would return to their 1990s [tax] levels of 36% and 39.6%.” What possible impact would this change have on the economy?

Brown: I have seen no studies which suggest if taxes are raised to the level they were under the Clinton Administration that those making more than $250,000 will work less, which would result in a net loss of tax revenue. So to my mind, there won’t be a negative impact on the economy and to the extent the extra tax revenue helps bring down the deficit, the economy will be better off. What most people don’t recall (or know) is that the marginal tax rate in America has been as high as 94% during the 20th century. When you compare that to 39.6%, it doesn’t look so bad!

Knowledge@Emory: The issue of tax breaks for large corporations has certainly come under fire. The breaks to the wealthy oil industry have been especially criticized. Just how useful are these breaks for job creation and the economy? When and how should they be used? And, is it critical to first deal with the matter of corporate tax loopholes? Is it possible to have a more transparent, egalitarian, and understandable tax structure for businesses?

Brown: It’s theoretically possible, but I don’t know whether it’s politically possible. Corporations spend large sums of money on lobbyists trying to obtain tax benefits. Last July, the Government Accountability Office noted that approximately two-thirds of U.S. corporations paid no federal income tax. President-Elect Obama has set forth an ambitious agenda for tax reform, which includes closing corporate tax loopholes. We’ll have to wait to see what will happen, although I believe the dire economic circumstances may help here. Corporations aren’t the most sympathetic taxpayers these days, so if President-Elect Obama can garner public support for his tax proposals, we may see some more history in the making.

Knowledge@Emory: President-Elect Obama also has mentioned his endorsement of reforming international tax loopholes. He has proposed removing foreign tax credit benefits to companies, as well as manufacturing deductions for the thriving oil and gas industry. The key reason for this, his plan notes, is to address the concern over companies shipping jobs overseas. Can offshoring be remedied through tax policy, considering businesses will always look to do business or manufacturing in areas of the world where things are cheaper?

Brown: Yes, but tax policy can’t be viewed in a vacuum. Each country has different regulations, so you not only take the tax laws as they are, you take the other regulations as they are. While American tax laws may not always work in a corporation’s favor, other regulatory schemes may. This is a more complicated question than just tax policy.

Knowledge@Emory: President-Elect Obama has also committed to taking on the complicated nature of the income tax filing system. Many political leaders have proposed the same thing, yet the tax system remains a convoluted and cumbersome process. While most political leaders would agree that the tax system is an awful one, why hasn’t something been done about the process, even after previous calls to address the problem? Is the revision of the tax policy merely prone to partisan infighting?

Brown: Right now, special interest groups lobby for more tax provisions, which add to the complexity of the tax law. What is needed is a systemic overhaul of our tax laws. Here is where I think the American public can play a significant role. If the public demanded a change, we would more likely see one. We saw the impact of public outrage during the recent bailout bill. Yes, we still have a bill, but it is a very different bill than was originally suggested by President Bush. Tax reform also will require the American public to be more realistic about their personal financial situations. For example, consider the support for the repeal of the so-called death tax. Most people want the estate tax (“death tax”) repealed even though they’re not subject to it. Why do you want to repeal a tax you’ll never have to pay? Because you’re hoping that one day you’ll become a multi-millionaire and become subject to it. That’s not realistic, yet we see survey after survey of Americans upset at the estate tax—something that they are not ever going to pay. 

Nov. 19 Panel Discussion on 'The Outlook for U.S. Tax Policy' 

On November 19, Professor Brown will participate in a panel discussion at Emory University’s School of Law titled "Great Expectations: The Outlook for U.S. Tax Policy" with featured guest speaker Edward D. Kleinbard, Chief of Staff, Joint Commission on Taxation. Connie Kertz, professor of accounting from Emory’s Goizueta Business School, also will participate in the event. More on the tax policy panel discusson.


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