Obama considers tax code overhaul

By Jackie Calmes
New York Times / December 10, 2010

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WASHINGTON — President Obama is considering a call early next year for an overhaul of the income tax code to lower rates and raise revenues in what would be his first major effort to begin addressing the long-term growth of the national debt, advisers said yesterday.

While administration officials caution that no decisions have been made and that any debate in Congress could take years, Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said.

The objective is to rid the code of its complex buildup of deductions, credits, and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much as a bipartisan majority on Obama’s fiscal commission recommended last week in its final blueprint for reducing the debt through 2020.

Doing so would not only be an opportunity to begin confronting the growth in the national debt but also a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness.

Obama signaled his inclination in off-the-cuff remarks Wednesday as he was defending the tax cuts deal negotiated with congressional Republicans this week. “We’ve got to have tax reform,’’ he said.

Economic and political advisers said the process is in its early stages, and Obama ultimately could decide against such action given the pitfalls politically and substantively.

Yet proponents within the administration and among some outside advisers said that Obama, by putting tax-reform atop the national agenda, could seize an opportunity to take the offensive in dealing with the newly empowered Republicans in Congress, repair his strained relations with business, and embrace a potentially powerful theme heading into his reelection campaign.

Democrats have long struggled to define battles over taxes on their terms, and the revolt by many members of the president’s party in Congress over his deal with Republicans to extend the Bush-era tax cuts has underscored deep ideological divisions.

Should that deal be enacted, however, it could create added pressure to simplify the tax system, because its mix of components, benefiting workers across the income spectrum, would further complicate the tax code, at least for the next year or two.

Administration officials and lawmakers also took note last week when the bipartisan show of support within the fiscal commission for changes suggested a potential break in the long-solid Republican wall of opposition to anything that smacked of a tax increase.

Rather than increase individual and corporate tax rates to raise more revenues, a majority of the panel proposed to eliminate or reduce many of the popular tax breaks for businesses and individuals that cost $1 trillion annually and to use the additional revenues both to lower rates and to reduce deficits.

The majority included five Republicans, including two of the Senate’s most conservative members, Tom Coburn of Oklahoma and Michael D. Crapo of Idaho.

According to commission officials, Obama’s Treasury secretary, Timothy F. Geithner, expressed interest in the panel’s approach. By ending or restricting tax breaks in return for lower rates, businesses and individual taxpayers would know that for each credit or deduction that they wanted put back into the code, their marginal tax rates would go up by an amount sufficient to make up the revenues that would be lost.

Obama, in his brief remarks Wednesday during a meeting with the president of Poland, suggested that Republicans will still be defending the Bush tax rates for the next two years while he is looking forward to a new, better code.

“We’re going to have a big debate about taxes, and we’re going to have a big debate about the budget, and we’re going to have a big debate about deficits,’’ he said. “And Republicans are going to have to explain . . . how making those tax cuts for the high end permanent squares with their stated desire to start reducing deficits and debt.’’

Tax cut package

Highlights of the compromise negotiated by President Obama and GOP lawmakers, which would cost a total of about $855 billion:
▸Extends, for two years, lower tax rates for taxpayers at every income level, lower taxes on capital gains and dividends, marriage penalty relief, more generous child tax credits, and education tax credits. Cost: $408 billion.

▸Creates a patch to spare about 20 million people from a significant tax increase from the alternative minimum tax in 2010 and 2011. Cost: $137 billion.

▸Establishes a lower tax on wealthy estates for two years. Under the provision, the first $5 million of a couple’s estate could pass to heirs without taxation, and an additional $5 million for the spouse. The balance would be subject to a 35 percent tax rate. Cost: $68 billion.

▸Cuts payroll taxes for one year, from 6.2 percent to 4.2 percent, for workers. Cost: $112 billion.

▸Extends dozens of business and individual tax breaks, many of which already expired this year. The provisions include incentives for producing ethanol and other alternative fuels, a business tax credit for research and development, a deduction for out-of-pocket expenses by teachers, and a federal income tax deduction for state and local sales taxes for people who live in states without local income taxes. Cost: $55 billion.

▸Increases depreciation and expensing for capital investments by businesses. Cost: $22 billion.

▸Extends for a year jobless benefits for people who have been unemployed for long stretches. Cost: About $55 billion.

SOURCE: Associated Press; preliminary projections by the Joint Committee on Taxation.