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Obama Would Push Taxes on Top Earners Above Clinton Level

Oct. 31 (Bloomberg) -- Bloomberg's Peter Cook reports on the differing ways Barack Obama and Mitt Romney are returning to campaign mode following Hurricane Sandy as we are less than a week away from the 2012 presidential election. He speaks on Bloomberg Television's "In The Loop."

President Barack Obama says he wants top earners to pay the tax rates they did under President Bill Clinton. He actually wants them to pay more.

By increasing investment taxes, limiting breaks and setting a minimum tax rate, Obama would extract more than $900 billion from the top 2 percent of earners over the next decade. That’s on top of the $849 billion that would flow to the government if the George W. Bush-era tax cuts expire for that group.

“Simply going back to what was in place in the ’90s is not going to be sufficient going forward,” said David Kamin, an assistant law professor at New York University who helped coordinate White House tax policy until he left the administration in March.

During his first term, Obama has revised his tax policies to place an even greater emphasis on top taxpayers than he had in 2008, proposing changes that make his budgets add up by raising their tax burden. That pattern points to the difficulty he may face, if re-elected Nov. 6, in reducing the long-term deficit while making only 2 percent pay more.

“If we’re going to be serious about raising substantial revenue to deal with the long-term fiscal imbalance, we’re going to have to think about broader tax increases,” said Joel Slemrod, an economics professor at the University of Michigan in Ann Arbor who said there isn’t enough money in the top tax brackets to address the country’s budget problems.

$200,000 Income

Obama pledged to avoid tax increases for the middle class during the 2008 campaign, contending that he could make his numbers work by boosting taxes only for income that exceeds $200,000 a year for individuals and $250,000 for married couples.

His goal was to let the Bush-era tax cuts expire and return to Clinton-era policy. That change would raise top tax rates to 36 percent and 39.6 percent, tax dividends as ordinary income, tax capital gains at a top rate of 20 percent and reinstate limits on deductions and personal exemptions.

The economy expanded when those policies were in place, sometimes by rates exceeding 4 percent a year. The unemployment rate fell below 5 percent in July 1997 and remained there until September 2001 amid that year’s recession and the terrorist attacks on the U.S.

Two-Year Extension

In 2010, after campaigning to let the tax cuts lapse, Obama signed a two-year extension of all of the Bush rates to prevent damaging a weak economy. He has said he won’t sign another extension of the rates when they are scheduled to lapse at the end of this year, a stance at the center of the showdown in Congress over the $607 billion fiscal cliff of automatic tax increases and spending cuts.

Obama, 51, has emphasized his claim about restoring Clinton-era tax policy, repeating it during his campaign speeches and using it to counter Republican presidential nominee Mitt Romney, who has proposed tax rate cuts paired with unspecified curbs on tax breaks.

“We can’t get this done unless we also ask the wealthiest households to pay higher taxes on their incomes above $250,000 - - pay the same rate we had when Bill Clinton was president,” Obama said Oct. 18 in Manchester, New Hampshire. “We created 23 million new jobs, and we went from a deficit to surplus. That’s how you do it.”

For high-income taxpayers, Obama has proposed several policies that would make them pay more than they did under Clinton.

Itemized Deductions

His first budget proposed going beyond the Clinton-era limits on tax breaks to cap itemized deductions of top earners. They would be able to claim them as if they were in the 28 percent bracket, not the higher ones. Obama later expanded that proposal to include other tax breaks, such as the exclusions of municipal bond interest and the value of employer-sponsored health insurance.

He has also proposed higher investment taxes that were passed by Congress. The 2010 health care law included a 3.8 percent tax on unearned income above the $200,000 and $250,000 income levels, effectively raising the top tax rates on capital gains and dividends. That law imposed an additional 0.9 percent tax on wages of high earners.

Those thresholds, unlike the others in Obama’s plans, aren’t indexed for inflation. They will expand over time, affecting 4.6 percent of households in 2022 compared with 2.4 percent in 2013, according to the Tax Policy Center.

Health Insurance

The unindexed tax on top earners’ investment income and the scheduled start in 2018 of an excise tax on high-value health insurance plans will bring in more money over time, essentially providing a backstop source of revenue, Kamin said.

Obama’s first three budget plans called for a top dividend tax rate of 20 percent, aside from the investment tax in the health law. The administration justified the policy on the grounds the rate should be equal to the tax on capital gains to avoid biasing business decisions. His most recent proposal, released in February, abandoned that reasoning and called for taxing dividends as ordinary income.

Dividend rates that high would encourage corporations to hold onto earnings even if they didn’t have productive uses for the money, said Pamela Olson, a deputy tax leader at PricewaterhouseCoopers LLP in Washington.

Obama also wants to impose what he has called the Buffett Rule, a 30 percent minimum tax rate for wealthiest households. It’s named for billionaire investor Warren Buffett, who says that he pays a lower tax rate than his secretary.

Multinational Corporations

In addition, Obama has proposed to raise taxes for some multinational corporations and tax private equity managers’ “carried interest” profit share as ordinary income instead of capital gains. Both of those changes would cost high-income taxpayers money.

“It’s a trade-off between the perceived benefits of a tax burden borne more heavily by upper-income people and the economic costs of doing that,” Slemrod said.

Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center in Washington, said his group doesn’t have an estimate that compares Obama’s proposals to Clinton policies.

Counteracting these proposals for higher taxes, there are at least two ways in which Obama’s tax policies would be more generous to top earners and the wealthy than Clinton’s were.

Obama proposes keeping the Bush-era tax rates on income below $200,000 and $250,000. That means everyone would pay the lower rates on the first part of their earnings, so many people whose incomes don’t exceed those levels by much could pay less than they did under Clinton.

Estate Tax

Obama is offering a much more generous estate tax policy than his Democratic predecessor. Under Clinton, the estate tax was scheduled to reach a $1 million per-person exemption with a 55 percent top rate. Obama wants to return to the $3.5 million exemption and a 45 percent top rate in place during 2009.

At one level, Obama has already broken his pledge to protect middle-class taxpayers, as he raised tobacco taxes and included tax increases without income limits in the 2010 health- care law. Those include a 10 percent tax on indoor tanning and a cap on the amount of money that can be put in tax-advantaged accounts for out-of-pocket health care expenses.

Romney, 65, says top earners won’t pay any less than they do now under his proposal. He would cut individual income tax rates by 20 percent and curtail tax breaks while repealing the estate tax and alternative minimum tax.

Economic Advisers

In a statement released Oct. 30, four of Romney’s economic advisers said there was no way that Obama’s plans could generate more jobs.

“While there may be dispute about how negative the effects of higher marginal rates might be, no economic theory supports the idea that the incentive effects of tax hikes on growth are positive,” said the statement from Glenn Hubbard, Gregory Mankiw, John Taylor and Kevin Hassett.

The Obama administration has justified the proposed tax increases as a way to counteract income inequality and make the budget add up. Under the president’s proposed budget, those tax increases and spending changes would combine to stabilize federal debt as a percentage of the economy.

“It reflects a concern that over the last 30 years, you’ve seen considerable income gains at the top and not the same income gains at the middle and the bottom,” Kamin said.

High-Income States

The $200,000 and $250,000 thresholds appeal to lawmakers and voters in high-income states such as California, New York and New Jersey.

“It’s dangerous to construct a tax system that relies on a very small percentage of the population,” said Olson, who was the top tax policy official at the Treasury Department for Bush.

Congress has blocked many of Obama’s ideas. The limits on deductions went nowhere in Congress under Democratic control in 2009, in part because of lobbying from charities worried about donations drying up. The expanded version also hasn’t attracted lawmakers’ support.

Kamin said that Obama’s proposed deduction limits aren’t as severe as the ones Romney has suggested, which would place a $17,000 or $25,000 cap on deductions and credits.

Senate Democrats brought a version of the Buffett Rule up for a vote in April. Republicans called it a gimmicky, counterproductive tax increase, and it didn’t get the 60 votes needed to advance beyond procedural hurdles.

Beyond the 10-year budget window, Obama hasn’t shown a path that either curbs projected spending increases on entitlement programs or raises taxes further.

“You can sort of hang in there until 2022,” Olson said, “and then things explode after that.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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