http://www.nytimes.com/interactive/2012/12/08/us/variations-on-obamas-tax-plan.html?ref=politics
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Despite
hints in recent days that President Obama and House Speaker John A. Boehner might
compromise on the tax rate to be paid by top earners, a host of other knotty
tax questions could still derail a deal to avert a fiscal crisis in January.
The math shows why. Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years. That would be about half of the $800 billion that Republicans have said they would be willing to raise.
The math shows why. Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years. That would be about half of the $800 billion that Republicans have said they would be willing to raise.
That
calculation alone suggests the scope of the other major tax issues to be
negotiated beyond tax rates. And that is why many people in both parties remain
unsure that a deal will come together before Jan. 1. Without agreement, more
than $500 billion in automatic tax increases on all Americans and cuts in
domestic and military programs will take hold, which could cause a recession if
left in place for months, economists say.
“The
question is making sure that we hit a revenue target that’s required for a
truly balanced deficit-reduction plan,” said Representative Chris Van Hollen of
Maryland
The top
tax rates are taking center stage right now because Mr. Obama believes he won a
mandate after campaigning relentlessly on the idea of extending Mr. Bush’s tax
cuts only for households with annual income below $250,000. But the two parties
also have ideological differences on taxes affecting savings, investment and
inheritance, which have flared in battles going back to the Reagan years. To
get a deal in the coming weeks, those differences must be addressed at least in
broad terms, even if the details are left to a battle over revamping the tax
code next year.
The
argument over rates is far from settled. Although the two sides seem close
enough on the percentages for easy compromise, principle and politics loom
large: Republicans oppose raising rates as a matter of ideology, saying that it
kills jobs, and the president insists that he will not keep the Bush-era rates
on income above roughly $250,000 after two campaigns in which he vowed to return
them to the levels of the Clinton years.
“Just to
be clear, I’m not going to sign any package that somehow prevents the top rate
from going up for folks at the top 2 percent,” he said Thursday.
In recent
days, comments from some Republicans, including Mr. Boehner, their chief
negotiator, have hinted that the party — recognizing its weak hand — might be
moving toward a concession on tax rates. Seldom mentioned is that Mr. Obama’s
revenue total also reflects four other changes from Bush-era tax cuts: higher
tax rates on investment income from capital gains and dividends, and the
restoration of two other Clinton-era provisions limiting deductions and tax
exemptions for affluent individuals.
Together
those changes would raise $407.4 billion over a decade — nearly as much as the
president’s proposal on higher rates, which would raise $441.6 billion by 2023,
for a total of $849 billion. Another $119 billion would come from higher estate taxes, opposed by
Republicans and some Democrats.
And both
the president and Republicans are committed to raising hundreds of billions of
dollars by overhauling the tax code to further limit or end the tax breaks that
high-income taxpayers can claim, though they differ in how to do that.
Republicans
want to raise all $800 billion from overhauling the tax code, erasing tax
breaks for high-income households and using the new revenues both to reduce
deficits and to lower everyone’s tax rates. But they have not proposed how to
do that, and the president insists it cannot be done without hitting
middle-income taxpayers.
Mr. Obama
has proposed to keep existing tax breaks but to limit the rate of those breaks
for people in higher tax brackets to 28 percent, which would raise $584 billion
in a decade. He has proposed variations of that proposal for four years, only
to be ignored by both parties because of opposition from charitable groups, the
housing industry, insurers and others to curbing deductions for charitable giving,
mortgage insurance and other purposes.
Yet both
parties seem poised to confront that opposition because they want a budget deal
to commit Congress and the White House to overhaul the tax code next year. That
is another reason Mr. Obama wants to have the top rates as high as possible:
The lower the rates now, the harder it would be to raise revenues next year in
overhauling the code.
Some
Republicans inside and outside of Congress agree. “Actually, I would rather see
the rates go up than do it the other way because it gives us greater chance to
reform the tax code and broaden the base in the future,” Senator Tom Coburn,
Republican of Oklahoma, said last week.
Roughly
splitting the difference on the top rates — settling at 35 percent and 37
percent — would collect nearly $200 billion over 10 years, under half the
amount that would be raised if the rates reverted to Clinton-era levels,
according to data from Citizens for Tax Justice and the Institute on Taxation
and Economic Policy, research groups that advocate for a progressive tax code.
In the
years of debate over the Bush tax cuts, which predates Mr. Obama’s first
election, $800 billion has been the rough estimate for how much revenue could
be raised in the first decade by ending them for the highest-income 2 percent
of taxpayers. But most attention focused on the top rates, which account for
half of the revenue equation.
The
remainder would come from the other four tax changes for Americans with the
highest income, two raising taxes on investment income from capital gains and
dividends and two restoring restrictions on the itemized deductions and
exemptions claimed by high earners.
Under Mr.
Obama’s plan, the tax rates for long-term capital gains and dividends, now 15
percent, would revert to 20 percent for capital gains and to 39.6 percent for
dividends, the same as for ordinary income. Republicans oppose the increases,
and Senate Democrats oppose the proposed tax on dividends; their bill would tax
both dividends and capital gains at 20 percent.
People in
both parties say that the four tax issues can be readily worked out. Mr. Obama
is widely expected to give ground on the main sticking point, the dividends
tax. Yet that would mean roughly $100 billion less in additional revenue over
10 years than his current proposal for the higher dividend tax.
Another
dispute is over estate and gift taxes. Here again Democrats are divided within
as well as against Republicans, and big money is at stake — $118.8 billion
through 2022 under Mr. Obama’s plan, or $143.3 billion counting assorted other
adjustments.
Currently,
a two-year-old bipartisan compromise holds that inheritances are taxed at 35
percent, with an exemption of $5 million for each spouse. On Jan. 1 that will
revert to a 55 percent tax beyond the first $1 million of inheritance. Mr.
Obama is seeking a middle-ground 45 percent rate beyond $3.5 million, but some
Democrats from states with large farms and ranches favor lower estate taxes.
All of
these tax issues await some agreement on the core issue of marginal rates. And
a final accord on taxes rests on separate questions of spending being settled —
Republicans will not give further on raising revenues until they know what
Democrats will agree to by way of long-term reductions in spending for Medicare and other
fast-growing entitlement benefit programs.
