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.
"It's hard to see how this dramatic tax increase, which zeroes in on those dynamic job-creating small businesses, will grow the private sector job base," Grassley said. "In fact, private sector job loss seems a more likely outcome."
Whatever the ultimate impact of Obama's policies, his goals are clear. In his budget request, he writes that the average income of the nation's top 400 taxpayers has nearly quadrupled since 1992 while middle-class incomes have stagnated. That trend, he writes, has been exacerbated by "irresponsible policy choices in Washington" that produced "huge tax cuts for the wealthy and well-connected," a reference to the Bush tax cuts.
Of the $1.3 trillion in new taxes Obama proposes to levy over the next decade, about half would be generated by simply letting the Bush tax cuts expire for high earners.
The tax plan would strike particularly hard on the Washington region, where one in seven families earns more than $200,000 a year, according to census figures. In affluent McLean and Potomac, nearly 45 percent of families hit that mark; in the District, about 12 percent of families do.
Taxpayers would begin to feel the bite when they file their 2011 taxes. Families with taxable income of at least $234,000 would:
-- See their top rate rise to 36 percent from 33 percent, while families with at least $378,000 in taxable income would pay a top rate of 39.6 percent instead of 35 percent. Income below those thresholds would be taxed at the current, lower rates.
-- Pay 20 percent on investment income instead of the current 15 percent.
-- Be permitted to claim a diminishing percentage of their itemized deductions as their income rises.
In addition, Obama proposes to raise another $318 billion by capping the overall value of itemized deductions at 28 percent. Republicans and Democrats alike have criticized that proposal, saying it could dampen charitable contributions and further depress home sales by limiting the deductibility of mortgage interest. An analysis by the Tax Policy Center indicates that the plan would reduce annual giving to charities by 2 percent, or roughly $9 billion.
Sperling defended the idea as "smart, fiscally responsible and progressive."
"If you want to take on major national challenges, like providing more coverage in health care in a fiscally responsible way, you have to make tough choices that are not going to make everyone happy," he said. Despite the grumbling on Capitol Hill, he said, the administration is "standing by" the proposal.
Some Republicans say they're having a tough time making the case against Obama. Rep. Paul D. Ryan, the senior Republican on the House Budget Committee, said he has found Obama's tax plans to be hugely popular back home in Wisconsin, where people blame Wall Street financiers for the collapse of the economy and the loss of Wisconsin jobs.
"Class warfare makes for good politics," Ryan said. "It preys on people's emotions of fear and envy. And, right now, those emotions are running at an all-time high."