Obama weighs income tax overhaul

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The New York Times
By: Jackie Calmes
December 10, 2010

Lower rates, higher revenue among goals to reduce national debt

WASHINGTON -- President Obama is considering whether to push 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.

While administration officials cautioned on Thursday that no decisions have been made and that any debate in Congress could take years, Mr. 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 like a bipartisan majority on Mr. Obama's debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.

Doing so would offer not only 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.

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

Obama assesses pitfalls
Economic and political advisers say the process is in its early stages, and Mr. Obama ultimately could decide against such action, given the pitfalls, both political and substantive. In the past, any effort to alter the tax code has provoked powerful opposition among interest groups, and the picking of winners and losers.

Yet proponents within the administration and among some outside advisers say that Mr. 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 re-election campaign.

Administration officials and lawmakers in both parties also took note last week of the bipartisan show of support within the fiscal commission for changes of the type being considered by Mr. Obama. That suggested a potential break in the long-solid Republican wall of opposition to anything that smacked of a tax increase.

Tradeoff: Limited breaks for lower rates
Rather than increase individual and corporate tax rates to raise more revenues, a majority of the panel proposed eliminating or reducing many of the popular tax breaks for businesses and individuals that cost $1 trillion annually and using the additional revenues to lower rates and reduce deficits. The majority included five Republicans, among them two of the Senate's most conservative members, Tom Coburn of Oklahoma and Michael D. Crapo of Idaho.

According to commission officials, the Treasury secretary, Timothy F. Geithner, expressed interest in the panel's approach. With tax breaks ended or restricted in return for lower rates, businesses and individual taxpayers would know that for each credit or deduction 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.

Some Democrats argue that the White House should take the lead, before Republicans do. Even as administration officials deliberate over their course, a growing number of conservative economists and strategists are urging Congressional Republicans to quit fighting the decade-old fight over the Bush tax rates and take up the reform mantle.

"Declare Bush tax cuts, like the Bush administration itself, over," Kevin A. Hassett, the director of economic policy studies at the American Enterprise Institute, a conservative-leaning research organization, wrote recently in a Bloomberg News column.

"The fact is," he added, "if we extend the Bush tax cuts, it locks in the status quo. Earth to Washington: The status quo stinks. With the economy still limping forward, much more significant fiscal-policy medicine is in order."

Mr. Obama, in his brief remarks on Wednesday during a meeting with the president of Poland, suggested that Republicans would 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 to the American people over the next two years how making those tax cuts for the high end permanent squares with their stated desire to start reducing deficits and debt."

"I'll have the opportunity," he added, "to make the case that we've got to have tax reform, that we've got to simplify the system, that we do have to cut spending where it makes sense. But we're also going to have to make sure that we've got a tax code that is fair and that looks after the interest of middle-class Americans and continues to grow the economy."

Next year will be the 25th anniversary of the previous overhaul of the income tax code that lowered rates and wiped away many tax breaks in return. As administration officials point out -- by way of lowering expectations for action soon -- the process leading to the 1986 act was begun nearly three years earlier, when President Ronald Reagan called for a fairer, simpler code in his 1984 State of the Union address. And the legislation several times seemed dead.

The earlier effort also involved a president of one party facing a Congress partly controlled by the opposition party.

While the overhaul of a quarter-century ago raised taxes for many corporations, the legislation was designed to be "deficit neutral" -- it neither increased nor reduced the government's tax collection over all. But people in both parties agree that the next tax-overhaul effort would almost certainly have to raise revenues to address the nation's growing fiscal problems.

"I think it is important to understand that that is not a process that will happen overnight," Robert Gibbs, the White House press secretary, said Thursday. "That will take -- as it did I think in the last major tax code revision in the mid '80s -- that will take some time." But, he added, Mr. Obama and his economic team "certainly believe that it's good to start that long process."

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