Correction to This Article
This article on President Obama's tax proposals incorrectly said that he had promised to tax only the top 2 percent of the nation's earners. Obama pledged to raise taxes for only the top 2 percent.

In Obama Tax Plan, A Shift of Wealth From the Top Down

President Obama's spending plan would give the poor new tax cuts, new college loans and a new health care system by taxing the rich nearly $1 trillion.
President Obama's spending plan would give the poor new tax cuts, new college loans and a new health care system by taxing the rich nearly $1 trillion. (By Joshua Roberts -- Bloomberg News)
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By Lori Montgomery
Washington Post Staff Writer
Saturday, March 7, 2009

It has been called a Robin Hood budget: The spending plan President Obama sent to Congress last week would give the poor new tax cuts, new college loans and a new health care system by taking nearly $1 trillion from the rich in new taxes.

Conservative radio host Rush Limbaugh and other Republicans are blasting the plan as "socialist" and accusing the administration of "class warfare." Even Democrats are balking at a key element of the plan, a proposal to raise money for health care reform by limiting the value of itemized deductions, including on mortgage interest and charitable contributions, for the nation's top earners.

But Obama is unapologetic in his pursuit of a fundamental shift in tax policy that would redistribute wealth from about 3 million elite families to forgotten lower and middle classes. "The past eight years have discredited once and for all the philosophy of trickle-down economics -- that tax breaks, income gains and wealth creation among the wealthy eventually will work their way down to the middle class," his budget states. "In its place, we need economic opportunity to trickle up."

Few analysts dispute the notion that the gap between rich and poor has widened to a troubling degree over the past three decades. But measures that use the tax code to fix this problem may carry their own risks. Republicans and other critics argue that Obama's plan would punish success and stifle the very kind of spending that would foster investment and economic growth. And with the nation facing record budget deficits, lawmakers have questioned whether Obama will be able to balance the government's books while keeping his promise to tax only the top 2 percent of earners.

Tax analysts say Obama is taking a page out of the playbook of former president Bill Clinton, whose administration supplied many of the key players on Obama's economic team, including Lawrence H. Summers, director of the National Economic Council, and Gene B. Sperling, a top aide at the Treasury Department.

Clinton, like Obama, argued that the rich had benefited disproportionately from tax cuts enacted by previous Republican administrations. When he took office, Clinton raised the top tax rate on families making more than $140,000 a year from 31 to 36 percent and created a new 39.6 percent tax bracket for families earning more than $250,000 a year.

Obama administration officials note that the economy boomed under Clinton, suggesting that his tax increases did little to dampen enthusiasm for hard work and professional achievement. Obama's decision to return to Clinton-era tax rates -- from the current top rates of 33 and 35 percent -- has the benefit of hindsight, they said.

"These are rates that we know from historical experience are consistent with growth, productivity and dramatic small-business expansion," Sperling, who helped draft the current tax package, said in an interview. He added that top earners would actually pay lower taxes under Obama's plan than they did in the 1990s: The administration plans to keep some of the tax changes enacted by former president George W. Bush, including a new 10 percent tax bracket and a lower tax rate on investment income than ordinary income.

Obama is, "in a sense, not continuing to let the most well-off have multiple tax breaks compared with the typical family," Sperling said.

Clinton, however, was not facing such a severe recession. Even some analysts who oppose extending the Bush tax cuts beyond 2010 worry that the economy may be too fragile for such a big tax increase, and they take little solace in the fact that the change wouldn't take effect until 2011. Republicans argue that Obama's plan would crush small businesses just as the recession is ending, hindering expansion and job growth.

Democrats counter that most small-business owners, whose profits flow through to their personal income taxes, do not fall in the top tax brackets. Overall, fewer than 2 percent do, according to the nonpartisan Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution.

But Sen. Charles E. Grassley (R-Iowa), the senior Republican on the Senate Finance Committee, argues that more than half of the most successful small businesses -- those that employ between 20 and 500 workers -- would be targeted by Obama's rate increases.

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