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Government: President Obama's tax leverage

Jacob Lew and Timothy Geithner 
President Obama's latest deficit-reduction plan includes more than $1.5 trillion in tax increases over 10 years, with most of the increase coming at the expense of taxpayers making more than $200,000 (as individuals) or $250,000 (as couples). So, more of the same, right? The House GOP has been winning all of these battles over tax increases; why should things be any different now?

The answer is that the result might not be different this year, but next year is a different story. That's because the Bush-era tax cuts are slated to expire at the end of 2012, which means Obama and his Democratic allies don't have to come up with a majority in the House or a supermajority in the Senate to approve a tax increase. They just need to assemble enough votes to sustain a veto of any attempt to extend the tax cuts.

The complicating factor is the desire on both sides to retain the Bush tax cuts for those in the lower brackets. As liberal economist Mark Thoma wrote, raising taxes on every taxpayer could "make a slow economy even slower."

Faced with a similar situation late in 2010, Obama cut a deal with Republicans to extend all of the Bush tax cuts for two years in exchange for several stimulus-oriented temporary measures. The biggest of these was a one-year cut in the payroll tax that disproportionately benefited working- and middle-class taxpayers.

The White House wants yet more stimulus -- witness Obama's American Jobs Act proposal, which would extend and increase the temporary payroll tax cut as well as some tax breaks for businesses. But the thing it covets most could be a tax overhaul that raises revenue by wiping out most deductions, exemptions and credits. Structured the right way, the overhaul could reduce marginal tax rates, which conservatives could embrace too if they weren't so beholden to Grover Norquist's point of view (i.e., any change that raises revenues, even if it lowers rates, is still a tax hike).

That's why I think the so-called Buffett rule, named after billionaire Warren Buffett, is just another bargaining chip. If the real goal is tax simplification, you don't advance the cause by creating a new type of minimum tax for millionaires. Instead, you apply the same tax rates to all forms of income, limit itemized deductions (or eliminate them and offer limited tax credits for such things as mortgage interest and charitable deductions), and have a few simple brackets for the sake of progressivity. That would bring effective tax rates for the wealthy -- the amount they actually pay -- far closer to marginal rates and ensure that Buffett and his ilk do indeed pay higher rates than their secretaries.

RELATED:

Taxing the wealthy to stimulate the economy?

Editorial: Is it a jobs generator?

Obama's speech: What about my pothole, Mr. President?

Government: Building a case for corporate tax reform

-- Jon Healey

Photo: White House budget chief Jacob Lew explains President Obama's deficit-reduction plan to reporters Monday as Press Secretary Jay Carney and and Treasury Secretary Timothy Geithner look on. Credit: Joshua Roberts / Bloomberg

 

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