Obama in Buffalo: tax reform is needed, but a flat tax isn't

President Obama told a town-hall meeting in Buffalo, N.Y., that the US will need to rein in its deficit soon, and that could include 'hard decisions' on tax reform. But he opposes the flat tax.

By , Staff writer

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    President Obama makes remarks on the economy after touring through Industrial Support Inc., in Buffalo, N.Y., Thursday. He commented on tax reform and his issues with a flat tax.
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President Obama said the nation must make "hard decisions" on tax policy, and that it would be better to find a fiscal fix in the next couple of years than to delay.

He avoided the hottest part of this hot-button topic: He didn't say whether he'd support tax hikes that may be recommended by a bipartisan fiscal commission he has created. (He has said all options should be "on the table" for the commission to consider.)

But in response to a town-hall questioner, Mr. Obama voiced support for efforts to streamline the tax code, even as he framed the case against a "flat tax" that many Republicans support.

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The president spoke at a town hall meeting in Buffalo, N.Y., a day after the federal government reported an unexpectedly high monthly budget deficit. The Treasury Department reported an $82.69 billion deficit for April, the highest ever recorded for that month.

"We're going to have to spend the next couple of years making some very hard decisions," Obama said. "It's not going to be any fun. [But] it's not going to be as painful as it will be if we put it off."

Deficits at unsustainable levels

The fiscal commission is expected to report to the president in December with recommendations on how to reduce US budget deficits. Without some new fix, budget deficits under Obama's forecasts would remain higher than 3 percent of gross domestic product every year this decade – a level economists see as unsustainable in the long run.

He spoke to a crowd of workers and guests at the Buffalo firm Industrial Support Inc. Following Obama's opening remarks on the economy and plans to spur job growth at small employers, one audience member asked what the president plans to do about the alternative minimum tax (AMT) and for his view on a flat tax rate for all Americans.

Obama used both parts of his response to argue in support of a progressive tax structure, where well-off Americans pay a higher tax rate than the middle class or poor.

The AMT, he explained, was designed years ago as a way to ensure that millionaires don't take advantage of loopholes to pay no taxes at all. The problem now is that a failure to index the AMT rate to inflation means that growing numbers of middle-class Americans are snared by the tax.

Obama said he expects his fiscal commission to recommend tax reforms designed to make the tax code simpler. But he argued against going to a flat tax, such as 10 percent of income. He said a flat tax might "take a bigger bite out of the cashier at the supermarket" while it "would mean a huge tax break for Warren Buffett."

While defending the progressive tax code, Obama voiced support for eliminating tax complexities that are rooted in lobbying rather than economic sense. "We've got to take out a hose and just eliminate a lot of these tax loopholes that are out there."

Some tax-policy experts say those moves could boost tax revenue, and thus help to close the federal budget gap, without raising income-tax rates. But they add that the budget deficits are expected to be so large in coming years that additional fixes – spending restraint and possibly tax hikes – will be needed.

Too many entitlements, too few taxes

A simple problem is that Americans have supported a level of spending – from Medicare entitlements to smaller programs – that's larger than federal revenues. The result is rising national debt and rising interest payments on that debt.

Most economists say Obama is correct that it is much wiser to address the imbalance soon than to wait until the debt burden is even bigger. The Greek debt crisis and European rescue plan have become the latest cautionary tale of what can happen when a nation goes over the fiscal edge.

Still, budget experts say political gridlock on US fiscal policy may be hard to break. One reason is partisan political differences, but another is that neither major party is keen to raise taxes or reduce entitlement benefits.

In addition to better balance between taxes and spending, part of the fiscal solution can be strong economic growth. That can result in higher tax revenue without raising taxes. Education isn't a sure recipe for growth, but Obama told another questioner that improving school performance must be part of the nation's economic agenda.

"If we are not able to train our people effectively," he said, "we will fall behind."

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