Obama Budget Shows $1 Trillion Tax Gap With Republicans

April 10 (Bloomberg) -- President Barack Obama wants to again rely on the top-earning U.S. households for most of the tax increases he’s proposing. Hans Nichols reports on Bloomberg Television's "Money Moves." (Source: Bloomberg)

President Barack Obama and congressional Republicans are $1 trillion and a conceptual leap apart on taxes, a policy gap accentuated by the administration’s 2014 budget.

Obama yesterday proposed higher taxes for top earners, estates, private-equity managers and tobacco users, wrapped inside a call for “reforming our tax code.” Republicans instantly rejected any tax increase as unacceptable.

“It seems like the president is going in one direction and a number of members of Congress are going in the other,” said Dave Kautter, managing director of the Kogod Tax Center at American University in Washington. “I don’t know that the cause of tax reform has been advanced any by the budget.”

The bipartisan consensus on lowering the corporate tax rate and curtailing some breaks goes only so far. Obama’s budget plan adds few details to a year-old framework.

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Meanwhile, the issue of how to tax businesses that pay through their owners’ individual returns still bedevils policy makers.

For the first time, Obama set aside some business tax increases to pay for a future corporate rate cut and in the process showed how difficult the effort would be. The $95 billion reserve -- funded largely with tax increases on U.S. companies’ foreign earnings -- would cover a rate reduction of about one percentage point, not the seven points sought by Obama or the 10 favored by House Republicans.

Photographer: Andrew Harrer/Bloomberg

Under U.S. President Barack Obama’s budget plan, in 2023 the federal government would collect 20 percent of the gross domestic product as revenue, the first time it would hit that mark since 2000. Close

Under U.S. President Barack Obama’s budget plan, in 2023 the federal government would... Read More

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Photographer: Andrew Harrer/Bloomberg

Under U.S. President Barack Obama’s budget plan, in 2023 the federal government would collect 20 percent of the gross domestic product as revenue, the first time it would hit that mark since 2000.

Raising Revenue

Last year’s framework suggested other ways to raise money, such as limits on accelerated depreciation and the deductibility of interest. Setting aside some base-broadening provisions for a future rate cut and not specifying others may help advance the debate in Congress, said Pamela Olson, U.S. deputy tax leader at PricewaterhouseCoopers LLP in Washington.

“If the administration were to lay out a lot more in the way of detail, maybe it would make it harder,” said Olson, the top Treasury tax policy official in President George W. Bush’s administration.

Obama included in his budget a version of a proposal from Representative Dave Camp, chairman of the House Ways and Means Committee, that would impose a mark-to-market taxation regime on derivatives and raise $19 billion.

Even a revenue-neutral corporate change would be “very difficult” to get through Congress, said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a Washington group that advocates for low-income households.

‘Loss Averse’

“People are very loss averse and lobbyists are even more loss averse,” he said.

Obama and Camp part ways on taxing individuals. The biggest tax increase in Obama’s budget would raise $529 billion over 10 years by capping the value of tax breaks such as the mortgage interest deduction and the exclusion of municipal bond interest at 28 percent.

That means someone in the top bracket with a 39.6 percent rate who had $10,000 in charitable contributions could get a $2,800 deduction, instead of $3,960 currently. The cap would affect married couples with taxable incomes of more than $223,050 a year and individuals with taxable incomes exceeding $183,250.

Carried Interest

Obama’s plan would tax the carried interest of private equity managers at ordinary income rates and impose a minimum tax on people with incomes of more than $1 million a year. He would raise the estate tax rate to 45 percent from 40 percent in 2018 while lowering the per-person exemption to $3.5 million from $5.25 million.

“If you’re serious about deficit reduction, then there’s no excuse to keep these loopholes open,” Obama said. “They don’t serve an economic purpose. They don’t grow our economy. They don’t put people back to work.”

Even as he applauded Obama for “stepping forward” on tax changes, Camp said a rewrite of the tax system should address both businesses and individuals.

“While looking to help corporate America, the president’s plan does not address how complex, costly and unfair the tax code is for American families and small businesses,” he said in a statement. “If the president is willing to do tax reform for Wall Street, then he should be willing to do tax reform for Main Street.”

Camp, a Michigan Republican, says he will pass a tax rewrite in his committee this year.

Senate Finance

He’s working with Senate Finance Chairman Max Baucus of Montana, one of four Democrats to vote against his own party’s tax-raising budget. Baucus has said he wants to reserve the question of how much revenue to raise for later.

The president’s tax proposals drew criticism from business groups and advocates for charitable groups who were primed to oppose the provisions Obama recycled from previous budgets.

The Retail Industry Leaders Association said the plan “falls short of the bold reforms needed.” The Business Roundtable, a group of chief executives that backs Obama’s corporate tax strategy, said it was “encouraged” by some parts of the tax plan and found others “not helpful.”

Oil and gas companies would lose at least $41 billion in tax breaks over the next decade.

“We as an industry support comprehensive tax reform that looks at all industries and all issues at the same time, brings them all to the table,” said Stephen Comstock, director of tax and accounting policy at the American Petroleum Institute. “To us, if there was a real proposal out there to address this, we’d be happy to discuss it. But we don’t see this as a real proposal.”

Gross Domestic Product

Under Obama’s budget plan, in 2023 the federal government would collect 20 percent of the gross domestic product as revenue, the first time it would hit that mark since 2000.

That’s compared with 16.9 percent this year and 19.1 percent projected for 2023 if Congress does nothing, according to the Congressional Budget Office. Congressional Republicans want to rewrite the U.S. tax code without adjusting overall revenue levels from the CBO projection.

In Obama’s plan, the federal government would collect a total of $41.2 trillion over the next decade, compared with $40.2 trillion if Congress raises no additional revenue. That means the two parties are about $1 trillion -- or 2.5 percent -- apart.

Obama’s renewed call for a rewrite of the corporate part of the tax code wouldn’t raise additional revenue for the government. Last year, the administration released a framework that sought to lower the corporate tax rate to 28 percent for most companies and 25 percent for manufacturers.

Tax Breaks

The budget plan doesn’t specify all of the tax breaks that would need to be eliminated or curtailed to meet those rate targets. The revenue target assumes -- as does the House Republican budget -- that tax breaks scheduled to expire at the end of 2013 would lapse as scheduled. That means extending any of them, such as the research and development tax credit, would need to be offset with savings elsewhere.

Unlike last year, the budget doesn’t call for continuing most of the expiring provisions, which include a deduction for teachers’ out-of-pocket expenses and a break that lets financial-services companies defer taxes on overseas income.

Those should either be made permanent or eliminated, said a Treasury official who briefed reporters on condition of anonymity. The budget extends tax breaks the administration sees as the most important, such as the research credit and the production tax credit for renewable energy.

Lower-Income Households

While Obama previously has pledged to prevent tax increases for married couples making less than $250,000, his budget plan would allow taxes to rise for many lower-income households. Obama’s plan to change the inflation gauge to the chained Consumer Price Index would make the standard deduction, personal exemption and tax-bracket thresholds grow more slowly than projected, causing more income to be taxed at higher rates.

The change in inflation measures would yield $100 billion in tax revenue over 10 years. The portion of the change affecting tax policy doesn’t include any provisions to soften the tax increase on lower-income households that would get a smaller standard deduction or earned income tax credit, the official said.

Obama proposes a $78 billion increase in tobacco taxes. Other new items in the budget include a cap on individuals’ tax-preferred retirement accounts and a requirement that those who inherit IRAs take taxable distributions over five years instead of their projected life span.

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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