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Janet Novack, Forbes Staff I write from D.C. about tax and retirement policy and planning.
Image via Wikipedia President Barack Obama will call today for an additional $3.2 trillion in deficit reduction over the next decade, including $1.5 trillion in tax hikes, mostly on the rich. His plan also includes $1.1 trillion in savings from winding down the wars in Iraq and Afghanistan and $580 billion in savings from “mandatory” programs, including $248 billion in Medicare cuts, but significantly, no increase in the age for Medicare eligibility and no Social Security trims.Contrary to earlier press reports, however, the plan Obama is sending to Congress’ Joint Select Committee On Deficit Reduction—the so-called Super Committee– won’t include a special new millionaire’s tax. Instead, Administration officials said in a background briefing with reporters Sunday night, Obama will call for tax reform to be based on five principles and one of those will be the “Buffett rule”—in honor of Berkshire Hathaway CEO Warren Buffett who has complained for years that he pays taxes at a lower rate than his secretary. An official put the rule this way: “People making more than $1 million should not pay a smaller share of their income in taxes than middle class people pay.” The other four principles, he added, are that tax reform should lower rates; reduce the deficit (in other words raise taxes) by $1.5 trillion over 10 years; close “wasteful loopholes and tax breaks”; and “boost job creation and growth.”
Republicans, too, favor tax reform and lower rates, but have ruled out raising any new revenue. On Thursday House Speaker John Boehner (R-Ohio) declared tax increases “off the table”. In an interview on NBC’s Meet The Press show Sunday, Senate Minority Leader Mitch McConnell (R-KY) dismissed any consideration of tax increases as “a bad thing to do in the middle of an economic downturn.”
The August political deal that raised the nation’s debt ceiling and averted a Treasury debt default created the Super Committee and charged it with coming up with a plan by Thanksgiving to trim at least $1.2 trillion from the deficit over 10 years. The Super Committee is made up of six Democrats and six Republicans and if it deadlocks—or its final product is voted down by Congress or vetoed by Obama–automatic budget cuts would kick in. Republicans insist the $1.2 trillion should come solely from cuts to spending, including to entitlement programs like Medicare and Medicaid.
Significantly, the Administration official said Obama is making his embrace of Medicare cuts contingent on tax increases being included in the final deal. “He’ll say he’ll veto any bill that takes one dime from the Medicare seniors rely on without asking the wealthy and the biggest corporations to pay their share,’’ the official said in a preview of Obama’s remarks. In another move that should similarly please his restive Democratic base, Obama is excluding from his proposal any change to Social Security, including a reduction in inflation adjustments for Social Security recipients that was part of a bigger deal he tried to strike with Boehner in July. “It’s his vision, not a legislative compromise,” an Administration official explained. “It’s inherently different form the grand bargain he was working on with the Speaker.” A higher age for Medicare eligibility was also, reportedly, considered as part of the failed bargain with Boehner but won’t be in Obama’s proposal. (Currently, Americans become eligible at 65 even if they haven’t yet claimed their Social Security benefits.)
In the Sunday night preview, Administration officials cast Obama’s plan as a total of $4.4 trillion in net deficit reduction —including cuts that were made in discretionary spending as part of the August deal and prospective savings on interest costs. (While Republicans are sure to dismiss Obama’s counting of war savings, they have done the same thing in their deficit plans.) Moreover, an Administration official noted, the $4.4 trillion is net of the cost of Obama $447 billion “jobs” proposal—a package of payroll tax cuts, infrastructure spending, and help for the unemployed designed to attack the nation’s stubbornly high 9.1% unemployment rate. Obama has proposed paying for that too with tax hikes Republicans have rejected, including a limit on mortgage, charitable and other deductions for the well off; elimination of the “carried interest” tax break enjoyed by the managers of hedge funds and other partnerships; and the repeal of various tax preferences enjoyed by oil and gas producers, including Exxon Mobil, Chevron and BP.
Indeed, most of Obama’s tax proposals will apparently repeat those he has made before. For example, $800 billion would come from letting the Bush tax cuts for families earning more than $250,000 expire at the end of 2012, meaning the top rate on ordinary income such as salary would rise from 35% to 39.6%. Last month, in a New York Times op-ed, Buffett called for two higher tax rates—one on income over $1 million and the other on income over $10 million. Published reports over the weekend variously suggested Obama would endorse a new millionaire’s rate or release some sort of proposal for a minimum tax on millionaires—say to replace the current convoluted alternative minimum tax. But Sunday night, the Administration official said the Buffett rule was simply a principle for tax reform.
Most people earning more than $1 million are already taxed at a higher effective rate than their secretaries. In 2008, for example, taxpayers with adjusted gross income between $1 million and $10 million paid an average of 24.5% of their adjusted gross in federal income tax, compared with an average of 12.6% for those earning $100,000 to $200,000, and 8.4% for those earning $50,000 to $100,000. But the 400 highest income taxpayers do pay a lower effective rate than mere millionaires—an average of just 18.1% in 2008. That’s because the top 400 get the bulk of their income from capital gains, which are taxed at a top rate of 15%, scheduled to rise to 20% when the Bush tax cuts expire at the end of 2012. If tax reform is to insure that billionaires pay a higher effective rate than the upper middle and middle class it would have to reduce or eliminate the break for capital gains—something that was done in Reagan’s 1986 tax reform but that doesn’t sit well with most Republicans today.
Stephen Collinson
An impassioned US President Barack Obama has set up an acerbic and personal clash with Republicans, demanding $US1.5 trillion ($A1.47 trillion) in new taxes on the rich in a plan aimed at slashing the deficit.
"This is not class warfare, it is math," Obama declared, arguing that without tax increases on those who could afford it, the budget gap - which is casting a shadow over future generations of Americans - could never be closed."All I'm saying is that those who have done well, including me, should pay their fair share in taxes," Obama said in a speech that effectively staked out the ground on which the 2012 presidential election will likely be fought.
But Republicans immediately came out against the move, making it more likely that a fierce partisan row over taxes and spending will rumble on and define the terrain of the 2012 presidential election.
"Pitting one group of Americans against another is not leadership," said Republican House Speaker John Boehner.
A fiery, populist Obama laid out a plan few experts believe has any chance of passing Congress but which will make clear the battle lines between the White House and Republicans on the lumbering economy.
"We can't just cut our way out of this hole," Obama said in the White House Rose Garden, laying out his plans to cut $US3.0 trillion from the deficit with a mixture of spending cuts and tax hikes.
"It is only right we ask everyone to pay their fair share," Obama said, in a direct challenge to House of Representatives speaker John Boehner, who has categorically ruled out any tax increases to trim the budget gap.
"We can't afford these special lower rates for the wealthy. We can't afford them when we are running these big deficits," Obama said, fighting for the end of tax cuts for the rich passed by former president George W Bush.
"Middle class taxpayers shouldn't pay higher taxes than millionaires and billionaires. That's pretty straightforward. It's hard to argue against that," said Obama, who has seen his approval ratings hammered by the slowed economy.
In a sign of the antipathy between Obama and Republican leaders after months of political confrontations, the president took personal aim at Boehner's refusal to contemplate any tax revenue raises.
"The speaker says we can't have it 'my way or the highway' and then basically says 'my way or the highway'."
"That's not smart. It's not right."
Obama's plan amounted to suggestions to a congressional supercommittee charged with finding up to $US1.5 trillion in deficit cuts by November.
The president threatened to veto any bill produced by Congress that was based on cutting medical benefits for the elderly but did not include increased revenues drawn from higher taxes on the rich and corporations.
Obama's plan effectively forced Republicans to defend continued favourable tax treatment for the wealthiest Americans and corporations while unemployment is at 9.1 per cent and economic frustration stalks the United States.
But Republicans, who say tax hikes would penalise small business and lower growth, reacted with contempt to his speech.
"Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth-or even meaningful deficit reduction," said Mitch McConnell, the top Republican in the Senate.
Mitt Romney, a leading Republican contender to take on Obama in the 2012 election, also rejected his plans as the action of a president who he portrays as out of his depth on the economy.
"President Obama's plan to raise taxes will have a crushing impact on economic growth," Romney said.
"This is yet another indication that President Obama has no clue how to bring our economy back."
Obama's plan includes $US1.2 trillion in cuts in federal discretionary spending already agreed in August as part of a compromise which ended a standoff with Republicans over raising the federal debt ceiling.
It includes $US580 billion in spending cuts across all mandatory spending programs and $US1.1 trillion of savings realised from drawing down US troop numbers in Afghanistan and Iraq.
Tax reform would result in $US1.5 trillion in savings, and a further $US430 billion will be found in additional interest savings elsewhere.
Included in the spending cuts will be $US248 billion in savings from Medicare programs for the elderly and $US72 billion in cuts from the Medicaid service for the poor, officials said.
© 2011 AFP
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Kym McNicholas, Forbes Staff