Economic Analysis: A Weakened Obama Mimics Clinton on Taxes

Deficit reduction and (unsuccessful) healthcare reform.

These two themes dominated the first two years of the Clinton administration and now they have become the dominant themes (so far) of the first two years of the Obama administration. The only difference is the order is reversed. President Clinton did deficit reduction in his first year and healthcare in his second.

Like Clinton in 1993, President Obama in 2010 will devote much of his effort to desperately needed deficit reduction. And like Clinton in 1993, he must fight a rear-guard action against the threat of a double-dip recession.

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The practice that the Clinton administration came close to perfecting is one of providing tax breaks that make excellent talking points but cost relatively little money. These are euphemistically known as targeted tax benefits. Even though they are no different from any other big-government program, enough Republicans can always be lured into going along because they can't resist anything that looks like a tax cut.

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Now the Obama team seems to be following suit. Why does the expanded child credit phase out between $85,000 and $115,000 while the new savers credit phases out between $65,000 and $85,000? There is no policy justification. In all likelihood, somebody working at 1500 or 1600 Pennsylvania Avenue picked these numbers out of a hat.

Indeed, why have any phaseouts at all? It is all for political appearances. (There is limited revenue saved from excluding higher-income taxpayers from these benefits.) The team does not want upper-income folks to benefit from their new proposal. That would water down their theme of helping the common folk

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Given the Clinton experience, we can't disagree with the political wisdom of expanding the scope of tax expenditures. But from the standpoint of tax policy, it stinks. It demonstrates a lack of commitment to true tax reform. It is, in fact, the opposite of reform.

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View TaxAnalysts' Martin Sullivan's opinion in its entirety on TAX.com.