Obama $1 Trillion Tax Proposal Slams Into Republican Wall

House Speaker John Boehner
House Speaker John Boehner, a Republican from Ohio, speaks after meeting with the House Republican caucus in Washington, D.C. Photographer: Jay Mallin/Bloomberg

President Barack Obama’s call for raising taxes by focusing on spending in the tax code was immediately rejected by top Republicans, signaling that any effort to increase the government’s take from the economy would be difficult to move through Congress.

As part of a $4 trillion deficit-reduction plan announced yesterday, Obama said he wanted Congress to overhaul the tax code by lowering rates, eliminating tax breaks and generating more money than the current system does. The plan would allow tax cuts affecting high-income taxpayers to expire at the end of 2012 and would raise $1 trillion on top of that.

“It’s important that we look at our tax code and find a way to work together to not only simplify and make the tax system fairer, but also that we use it as a tool to help us achieve our deficit targets,” Obama said at the White House today before meeting with Erskine Bowles and Alan Simpson, who were co-chairmen of a fiscal commission last year that outlined a similar tax plan.

Republicans, including House Speaker John Boehner and Senator Orrin Hatch, rejected Obama’s argument that tax increases should be part of a deficit-reduction package.

“I don’t think we’re any closer to actually doing a bill than we were a day ago or a month ago,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington. “Given the fundamental disagreement on top rates and the fundamental disagreement on who should bear the tax burden, it’s going to take a while for the parties to work together.”

Republican Plan

Obama’s task in raising revenue by curtailing tax breaks is similar to the one that House Republicans set for themselves last week. Representative Paul Ryan’s budget plan calls for lowering top tax rates to 25 percent and keeping revenue at a level consistent with extending all income tax cuts permanently.

The president’s $1 trillion target over 12 years is smaller than the Republicans’ 10-year, $2.9 trillion goal. In a speech announcing the plan yesterday at George Washington University in the capital, Obama did not specify how much of the revenue generated by cutting tax expenditures he would use to lower rates.

Both approaches are ambitious enough that they would require Congress to examine the largest benefits received by U.S. taxpayers, including the deductions for mortgage interest and charitable contributions and the exclusion of employer-provided health care.

That’s where the similarities end, and the two parties disagree on the amount of revenue to collect and on who should pay. Obama used his speech to draw distinctions between himself and congressional Republicans, in particular to his approach to the tax cuts scheduled to expire at the end of 2012.

‘Can’t Afford It’

“In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans,” Obama said. “But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.”

Obama’s emphasis on generating tax revenue from top earners reflects his 2008 campaign pledge not to raise taxes for individuals earning less than $200,000 a year or married couples earning less than $250,000, said Diane Lim Rogers, chief economist of the Concord Coalition in Arlington, Virginia, which advocates deficit reduction.

Obama didn’t specifically mention that pledge in yesterday’s speech.

“If we can’t talk him into breaking that promise,” Rogers said, “then the second-best thing we could do is to tackle the really big tax expenditures and limit them to only people he deems middle class and below.”

Individual Tax Code

Obama proposed a version of that concept in his 2012 budget. He suggested capping itemized deductions at 28 percent, which would limit benefits for taxpayers with high incomes. In yesterday’s speech, he said he wanted to go further.

The speech marked Obama’s first attempt to seek major changes in the structure of the individual tax code, beyond the corporate tax proposals he made in the State of the Union address.

He reiterated his support for lowering the corporate tax rate and removing business tax breaks. His backing for revenue-raising tax changes puts him at odds with many congressional Republicans, including House Majority Leader Eric Cantor of Virginia and Ways and Means Chairman Dave Camp of Michigan, who contend that deficit reduction should be accomplished through spending cuts alone.

“Any plan that starts with job-destroying tax hikes is a non-starter,” Boehner, an Ohio Republican, said in a statement yesterday.

Deficit Commission

The deficit commission suggested a tax structure that would feature a top tax rate of 28 percent, down from the 35 percent current top rate. That plan would also tax capital gains and dividends as ordinary income and convert the mortgage interest and charitable contribution deductions into limited credits.

Montana Senator Max Baucus, who voted against the fiscal commission’s plan in part because he said it would hurt rural America, said in a statement yesterday that Congress should seek a balanced approach that looks at spending and revenues.

Taking Steps Together

“We should begin with the assumption there will be at least some steps we have to take together that would not be the preference of each of us alone,” said Baucus, chairman the Senate Finance Committee.

Obama set a late June deadline for reaching a bipartisan agreement on deficit reduction and said that Vice President Joseph Biden would lead talks starting in May.

Camp, who has proposed cutting the top individual and corporate rates to 25 percent, called Obama’s rhetoric “unnecessary, unhelpful, unproductive” and too partisan.

“I stand ready to continue to work on these issues but I think much of the approach made it harder for us to do that,” he said.

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