Obama Tax Agenda Widens Partisan Gulf

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US President Barack Obama waves from Air Force One prior to departing from Andrews Air Force Base in Maryland, January 21, 2015.

SAUL LOEB/AFP/Getty Images

Democrats are abandoning what was once an area of promising bipartisan agreement on tax policy: lowering individual tax rates and broadening the base.

The party, led by President Barack Obama, is instead increasingly viewing tax policy as a means to other ends -- a way to finance breaks for education and child care and to fight middle-class wage stagnation. That puts them at odds with Republicans, who champion lower rates and a simpler tax code as the path to economic growth.

That widening gulf -- amplified in Obama’s State of the Union speech Tuesday night -- makes it harder to see a bipartisan approach to revamping the individual tax system while he’s in office. As the two parties develop their agendas for 2016, they’re not even speaking the same language on tax policy for individuals.

Obama’s latest proposals would leave ordinary income-tax rates untouched for top earners and narrow the base for middle-income families with children. That continues the president’s shift away from the approach that propelled the last major tax change in 1986 and provided the framework for failed bipartisan proposals from 2010 to 2014.

“The president is changing the tax debate and that’s what matters,” said Senator Sherrod Brown, an Ohio Democrat who says he supports Obama’s goal of focusing on the middle class. “He’s clearly changed the debate so there’s revenues from places we ought to be getting revenue from and tax relief for people who ought to be getting tax relief.”

New Breaks

The White House announced proposals on Jan. 17 that would raise $320 billion over a decade and use most of the proceeds for new tax breaks for two-earner couples, child care and education.

The plan would raise the top capital gains rate to 28 percent from 23.8 percent and impose a new tax on the largest financial institutions, in addition to other tax increases for the highest earners that Obama has sought for several years.

His plan would also repeal a rule that lets people pass along assets to heirs without paying capital gains taxes on the growth in value.

Obama’s proposal counts on revenue from limiting tax breaks for 529 college savings accounts and flexible spending accounts for child care.

“Let’s close the loopholes that lead to inequality by allowing the top 1 percent to avoid paying taxes on their accumulated wealth,” Obama said in his address at the Capitol Tuesday night. “We can use that money to help more families pay for child care and send their kids to college.”

Business Taxation

The focus on lower rates and fewer tax breaks still governs the administration’s approach to the business side of the U.S. tax code, an area where Obama said he thinks he can reach a deal with the Republicans who control Congress.

“While our views on individual tax reform may be far apart, there is a broad set of business tax reforms on which we should be able to agree,” Treasury Secretary Jacob J. Lew said Wednesday at a speech in Washington.

The Democrats’ approach to tax policy for individuals comes after more than a decade in which the expiring rate cuts enacted under former President George W. Bush dominated the party’s agenda on taxes. Obama campaigned on ending those cuts for the highest-earning Americans -- and it took two presidential elections and a last-minute deal for him to get that in January 2013.

In the early years of Obama’s administration, even without making a proposal of their own, officials were more open to a tax revamp that would have lowered marginal rates, said David Kamin, a White House tax-policy adviser in Obama’s first term.

Budget Talks

That concept was part of the unsuccessful talks Obama had with House Speaker John Boehner about a big budget deal in 2011. The last two Democratic chairmen of the Senate Finance Committee -- Max Baucus and Ron Wyden -- favored cutting marginal rates for individuals as part of a tax agreement.

That strategy has changed for a few reasons, among them many Democrats’ reluctance to give up the victory they won in restoring the top marginal tax rate to 39.6 percent.

There’s also the math.

In 2012, Republican presidential candidate Mitt Romney had trouble making the arithmetic add up on his call for deep individual rate cuts without increasing the budget deficit or shifting the tax burden to the middle class.

Last year, Dave Camp, then-chairman of the House Ways and Means Committee, proposed a plan that required major changes to some of the most popular deductions -- for mortgage interest, charitable contributions and state taxes -- and was only able to get the top tax rate down to 35 percent from 39.6 percent.

The administration became less interested in an individual tax revamp in that mode, even as part of a bigger deal.

‘More Progressive’

Now, “it’s much more focused on getting revenue for key investments and making the tax code more progressive,” said Kamin, an assistant professor of law at New York University.

“It’s a very good start in terms of where the discussion ought to go,” said Senator Charles Schumer, a New York Democrat. “Middle-class incomes are declining, and we have to do something about it.”

The policies drew immediate Republican opposition.

“One goal of tax reform is to lower marginal rates, reduce a lot of the underbrush and the deductions and credits and the like,” said Senator John Cornyn, a Texas Republican. “And he’s talking about making it more complicated. We ought to make the tax code simpler, fairer and flatter, and he’s doing the opposite.”

Education Breaks

Obama’s plans include some simplification, such as the consolidation of multiple tax breaks for higher education.

In some ways, he’s returning to the tax principles he set out early in the 2008 campaign, before the financial crisis and recession, said Douglas Holtz-Eakin, who was a policy adviser to Republican John McCain’s 2008 presidential campaign.

“First, it feels like giving up on genuine economic growth improvement and relying on a tax transfer scheme for well-being,” he said. “Second, there is a lot of talk about tax reform, but this is cherry-picking what should be elements of a complete plan and gets in the way of real reform.”

Obama’s proposals are more likely to set the Democratic Party’s tone for the 2016 election than become the basis for a law.

By that measure, he’ll be just one voice -- though a loud one -- as Democrats formulate their tax-policy ideas. His plan is still tamer than one released this month by Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee.

Van Hollen’s proposal includes a $1,000 tax credit for middle-income workers and a tax on financial transactions.

Obama is seeking to use the tax code to achieve goals that could also be accomplished with spending programs for child care and education, said Ed Kleinbard, a tax law professor at the University of Southern California.

“This is not tax reform, and to criticize it for being ineffective tax reform is unfair, because that’s not the purpose,” said Kleinbard, former chief of staff of the congressional Joint Committee on Taxation. “The purpose of this is to invest in the next generation.”

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