Obama Proposes High-Earners Pay 30 Percent of Income as Tax

U.S. President Barack Obama
U.S. President Barack Obama, front center, delivers the State of the Union address to a joint session of Congress with U.S. Vice President Joseph "Joe" Biden, back left, and House Speaker John Boehner at the Capitol in Washington. Photographer: Joshua Roberts/Bloomberg

President Barack Obama called on Congress to require the highest U.S. earners to pay at least 30 percent of their income in taxes, building on his election-year push for what he terms economic fairness.

The president’s proposal in his State of the Union address tonight would create a minimum tax on income exceeding $1 million. That floor would be established in part by eliminating high earners’ deductions for mortgage interest, health care, retirement and child care. Given congressional gridlock, there is little chance of its enactment this year.

Obama is pressuring Republicans, who have resisted tax increases, on a day that began with Republican presidential candidate Mitt Romney releasing tax returns showing he paid a 13.9 percent tax rate in 2010 on $21.6 million in income.

“We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said in his address to a joint session of Congress. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.”

Congressional Republicans repeatedly blocked efforts over the past year to impose a surtax on income exceeding $1 million to pay for an extension of a payroll tax cut.

Billionaire investor Warren Buffett ignited the focus on the tax treatment of millionaires when he said in August that his $6.9 million tax bill in 2010 was 17.4 percent of his total taxable income that year.

10 Percent to 35 Percent

Marginal tax rates range from 10 percent to 35 percent. High earners can drive their rates down if they make large charitable contributions, which can be deducted, or receive much of their income from investments, which are taxed at a preferential rate compared with wages.

Buffett said his tax rate was lower than that for his secretary, Debbie Bosanek, who watched the speech from the spectators gallery in the U.S. House of Representatives.

“Tax reform should follow the Buffett rule,” Obama said. “If you make more than $1 million a year, you should not pay less than 30 percent in taxes.”

Curbing deductions alone wouldn’t be enough to create a minimum 30 percent tax for the highest earners because many top earners benefit from the preferential tax rate for investment income. For example, Romney reported $4.5 million in itemized deductions in 2010 while more than half of his income came from capital gains, which is taxed at a 15 percent rate instead of the rate for ordinary income.

Alternative Minimum Tax

Instead of raising taxes on investment income, the Obama proposal would create a new 30 percent alternative minimum tax for high earners, said an administration official at a White House briefing prior to the speech. The official wasn’t authorized to speak publicly.

The emphasis on high earners is a departure from Obama’s previous State of the Union address, when he called on lawmakers to work together to cut the corporate tax rate for the first time since 1986 without adding to the deficit. His speech also called for tax incentives for companies that “bring jobs home.”

With lawmakers unable to agree on basic policy questions, such as whether a tax cut should be paid for, the chances of an agreement on such comprehensive tax code changes before the election are dim, said Brian Gardner, the senior vice president for Washington research at KBW Inc.

“We’re in an environment of hyper-gridlock,” Gardner said. “The president can propose whatever he wants but I don’t see Republicans signing onto anything.”

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