19/09 Who wants to tax a millionaire?

Budget politics

Sep 19th 2011, 19:32 by G.I. | WASHINGTON

THIS much can be said for the deficit plan that Barack Obama released today: at least it’s a plan. Mr Obama has spent the first two and a half years of his presidency talking grandly about the importance of getting the deficit down without ever laying out a credible plan for doing so, in the process ceding the initiative to Republicans.

The 67-page proposal meets the first test of credibility: it sets the right goals. It would reduce the deficit by a cumulative $3.1 trillion over the coming decade, beyond the $912 billion of spending cuts already agreed to in the August 2nd debt-ceiling deal. The annual shortfall would fall from $1.3 trillion this year to $695 billion in fiscal 2021. That would cut it from 8.5% of GDP to 2.9%, instead of only to 6%, which is where the White House says it’s headed under current policies. (That's using the Congressional Budget Office's "adjusted" baseline. Using the White House's own baseline, the deficit in 2021 would be smaller by 0.6% of GDP.) Publicly-held debt would stabilise at 74% of GDP, rather than rising to 85% and beyond. It also avoids applying the fiscal brakes immediately when doing so could tip an already feeble economy back into recession, thanks to his previously announced $447 billion in new stimulus.

Sadly, the details of Mr Obama’s plan do not live up to the promising goals. On spending it relies too much on one-off cuts to the military and a laundry list of untried and controversial trims to mandatory programmes and on taxes, a frustratingly vague tax plan that sacrifices meaningful reform to the more symbolic goal of raising taxes on the rich.

It splits deficit reduction equally between spending cuts and tax rises, but two-thirds of the spending cuts, $1 trillion, come from capping overseas combat-related spending. Such spending was unlikely to continue at current levels except in the gloomiest scenarios. Most of the remaining spending cuts come from mandatory programmes—those that do not need to be reauthorised each year by Congress, such as capping subsidies for crop insurance and farmers’ incomes, while compelling federal civil servants to pay more for their pensions. These are worthwhile proposals that were at the centre of the common ground reached over the summer between Joe Biden, the vice-president, and Republicans.

The real money lies with the big three entitlements. But Mr Obama doesn’t go near Social Security (pensions for the elderly). He seeks to cut $320 billion from Medicare and Medicaid through a host of measures, the largest of which involves cutting payments to providers, such as $135 billion from Medicare payments to drug manufacturers. There’s nothing wrong with these initiatives, but even in the best of worlds Mr Obama was never going to implement all of them given their powerful lobbying protectors. A more durable reform would challenge either benefits or eligibility, but the closest Mr Obama gets is raising Medicare premiums for more affluent beneficiaries.

On taxes, Mr Obama’s plan is even more of a disappointment. Legislators and economists of all political persuasions agree America needs to lower or hold constant marginal tax rates while eliminating or curbing deductions, exemptions and credits that now cost roughly $1 trillion per year. Such an overhaul could make the tax system both more efficient by removing distortions and disincentives to work, and more progressive, since the affluent make more use of such loopholes than the poor.

Mr Obama seems to care greatly about progressivity and not at all about efficiency. He does not bend from his absurd election promise that 98% of households should never pay higher tax rates, proposing only to raise rates and limit the tax deductions of the remainder. He also calls for a brand new “Buffett tax”, named for the billionaire Warren Buffett who has vociferously decried the ability of people of his means to pay such low taxes. The specifics are not provided, but it would require that people who make more than $1m pay at least the same rate that middle-income taxpayers do.

Republicans have screamed “class warfare” at so many sensible policies that would raise taxes on the rich that one tends to tune them out these days. Yet in this case, they might have a point. The millionaire’s tax, depending on how it was implemented, would almost certainly make the tax code less efficient while raising little additional revenue. The same aim could be achieved simply by taxing capital gains and dividends at ordinary income rates, as they were before Bill Clinton and George Bush lowered the rates. Coupled with a corporate-tax reform that lowered the top corporate rate, such a proposal would both make the system more progressive and more efficient. That Mr Obama has yet to publicly propose such a thing is a telling sign that he is at present more interested in the optics than the substance of his proposals.

Of course, Mr Obama has no expectation that his plan will pass. Even before the details had been released, Republicans had lined up to shoot down any proposal to raise taxes. If one takes them at their word—and they have stuck to it so far this year despite some late night wobbling by John Boehner, the speaker of the House of Representatives—then there is no hope that Mr Obama’s “balanced approach” will pass either the 12-member “supercommittee” now trying to find $1.5 trillion in deficit savings, or the entire Congress. Mr Obama now promises to veto any deficit plan that doesn’t include new revenues. If both sides stick to those positions, then the super committee will fail, tiggering $1.2 trillion in automated spending cuts that will kick in starting in 2013.

Still, Mr Obama will have accomplished his goal. Over the summer, he put his neck on the line by trying, without success, to strike some kind of grand bargain with Republicans to both raise taxes and cut entitlements. He got nothing to show for it except an angry and disillusioned base threatening to desert him at next fall’s general election. Even if the plan offered today goes nowhere, it is a document he can carry proudly into the election to portray Republicans as unrepentant friends of the rich, a message that, judging from recent polls, resonates with the public. Still, reading the politics right isn't the same thing as advancing the cause of America’s economy or its long-term finances.