The New York Times
By: Jonathan Weisman and Annie Lowrey
January 26, 2012
Administration's talk of taxing rich more faces political realities in election year
President Obama's call for ''tax fairness'' and Mitt Romney's tax returns have catapulted the debate over tax increases on the rich to the top of the political agenda. But with even some top Democrats hesitant, the prospects of a so-called Buffett tax on high-earning households remain uncertain, if not remote, for the immediate future. What is left may be only politics, at least until after the November elections.
Democrats promised Wednesday that this time their calls for serious tax changes for the rich were serious. For two years, when their party controlled both houses of Congress and the White House, Democratic leaders failed to change the rules on ''carried interest'' to ensure that private equity titans and venture capitalists pay more than a 15 percent tax rate on fees reaped from their investor clients. Democrats hardly mentioned raising the 15 percent tax rates on dividends and capital gains, the largest reason the super-rich pay less of their income in taxes than many middle-class families.
But that was before Mr. Romney released a 2010 tax return that showed income of $21.6 million, and an effective tax rate of 13.9 percent, a rate more typical of a household earning about $80,000. An Individual Retirement Account with significant investments in the Cayman Islands valued at $20 million to $100 million, along with investments scattered in tax havens from Switzerland to Luxembourg to Ireland, has also provoked scrutiny.
''All you need to do is look at the former governor of Massachusetts' tax return to understand why this has become an emergency,'' Senator Harry Reid, the Nevada Democrat and majority leader, said Wednesday, referring to Mr. Romney.
Senator Charles E. Schumer, Democrat of New York, seconded Mr. Reid's call for fast action on tax changes for the rich. Mr. Schumer for years resisted efforts to change the provision that lets Wall Street private equity managers declare their fees as capital gains, before advocating a watered-down approach and now accepting full elimination of the carried-interest provision.
But beneath the political talk, there appears to be little rush to the legislative barricades. House Democratic negotiators have suggested that changes to the carried interest rule could be used in part to pay for a 10-month extension of the payroll tax cut. Mr. Reid called that unrealistic.
Even the White House says the changes Mr. Obama envisions would be part of a tax code overhaul, not a quick fix. ''This is not going to be a line item in our budget,'' a senior administration official said Wednesday.
In that sense, the fate of Mr. Obama's push will be decided by the voters in November. But he has put the issue squarely at the forefront of the political conversation. ''The president has said before that that's what the election is all about,'' said Senator Jon Kyl, Republican of Arizona. ''Maybe it will be.''
After the election, changes will be coming, regardless of the occupant of the White House. If nothing is done, the tax code put in place by Congress and President George W. Bush through successive tax cuts in 2001 and 2003 expires Jan. 1. At that point, the capital gains tax rate would rise to 20 percent from 15 percent. Dividends would once again be taxed as ordinary income, meaning for the rich, rates on dividends would jump to 39.6 percent from 15 percent.
Adding another wrinkle, under the 2010 health care law, a new 3.8 percent tax on passive income -- dividends, capital gains, interest and other unearned income sources -- goes into effect for high earners in 2013. That would raise total capital gains rates to nearly 24 percent for households earning more than $250,000.
Those automatic changes could give Democrats substantial leverage to win tax code alterations on their terms, they say, especially if Mr. Obama wins re-election. The administration plans to call for the Bush tax cuts to expire for the top 2 percent of earners, those making more than about $250,000 a year. It also plans to propose reducing or eliminating a host of deductions and credits, like the mortgage-interest deduction and child tax credit, for the top 2 percent of earners. A senior administration official said that the White House would call for retaining the exclusion for charitable giving, and would not touch the estate tax.
In the ''Buffett Rule,'' the president may have found a way to win tax increases on the rich that have so far been stymied. Under the Obama formula, the existing alternative minimum tax would be replaced by an alternative tax system aimed only at those with adjusted gross earnings over $1 million, the senior official said.
Such high earners would most likely calculate their taxes based on the ordinary tax system. If their effective tax rate ends up below 30 percent, they would owe enough additional taxes to get to 30 percent. If their effective rate exceeds 30 percent, they would pay the higher rate.
By creating such a floor, the proposal obviates the need for Congress to change the rules on carried interest, capital gains or dividends, since the rich would already be paying what Mr. Obama sees as their ''fair share,'' the official said. Hedge fund titans and private-equity investors like Mr. Romney generally take home 15 percent or 20 percent of their funds' profits, called the carry or carried interest. Those earnings are often taxed as capital gains at 15 percent, rather than regular income at up to 35 percent.
But tax experts were not so enthusiastic. They faulted the administration as making the code more complicated, particularly given that Mr. Obama has previously called for broad-based tax reform to clear out the thicket of tax expenditures, loopholes and deductions. Indeed, in his 2011 State of the Union address, Mr. Obama called simplifying the tax code ''the best thing we could do on taxes for all Americans.''
''They're using a baseball bat, rather than a scalpel'' by applying the 30 percent minimum rate, said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. ''By proposing the Buffett Rule, they're saying: 'We don't like how the tax code is working. We're worried that there are some very wealthy people who aren't paying a fair share,' '' he said. ''But instead of eliminating deductions and simplifying the tax code, they're just introducing more bells and whistles.''