Obama Putting Tax Increases Back on Budget Table

WASHINGTON -- Higher taxes have been missing from the fierce budget battle that nearly shut down the federal government. But President Obama is about to put them on the table -- at least a modest version that he had pushed before and then rested on the shelf.

Most economists and budget analysts say a comprehensive mix of spending cuts and tax increases is essential to any viable deficit-reduction plan. Yet few players in the negotiations have gone there.

It comes in the scramble to heed what is widely viewed as a loud clamor from voters to slam the brakes on runaway government spending. There has been no corresponding public demand for raising taxes. That's not surprising, but the top-bracket U.S. tax rate now is the lowest it's been in decades, and it's far lower than those in many other industrialized countries, especially in western Europe.

Tax elements of Obama's broad deficit-reduction plan, to be laid out in a speech Wednesday, seem likely to revive his earlier proposals.

The president is expected to bring back his recommendation, first made in the 2008 campaign, to end Bush-era tax cuts for households earning over $250,000 a year. He temporarily set it aside when he signed onto a late 2010 agreement with Republicans to extend all Bush tax cuts for two years.

However, he did renew the bid earlier this year in his budget for the 2012 fiscal year that begins Oct. 1.

Any comprehensive deficit-reduction plan must include a mix of spending cuts and tax increases, experts argue from both sides of the political spectrum.

"There's no alternative, and I don't know of anybody who has seriously looked at this problem who thinks there is," said William A. Galston, a White House domestic policy adviser during the Clinton administration. "You're going to need to put together tough packages of programmatic cuts and revenue increases."

With a presidential election just around the corner, and voters demanding cuts in government spending, few politicians seem eager to climb out on a higher-taxes limb.

Even Obama's bid to end Bush-era tax cuts for the wealthiest Americans -- bitterly fought by Republicans -- would just take tax rates on them back to where they were in the 1990s, a decade of strong economic growth.

A sweeping Republican proposal laid down by House Budget Committee Chairman Paul Ryan of Wisconsin proposes trimming more than $5 trillion from deficits over the next decade, but it does so almost exclusively on the spending side of the ledger, including a drastic reshaping of Medicare and other federal safety-net entitlement programs.

The Ryan plan doesn't only fail to propose major new tax increases, it advocates lowering the top tax rates for both corporations and individuals to 25 percent from the current 35 percent.

This comes amid disclosures of low tax payments by some of the nation's biggest companies, including General Electric Co., which made $14.2 billion in worldwide profits last year, but paid no U.S. corporate taxes in 2010.

"We strongly disagree with the lack of balance in Congressman Ryan's approach," White House spokesman Jay Carney said Monday. "We understand that people will come to the table with different views, but the president believes that we have to have balance."

Heavy pressure from the tea party wing of the Republican Party, with its insistence on smaller government and strong opposition to new taxes, has complicated efforts by Republican leaders, especially House Speaker John Boehner of Ohio, to find common ground with the White House.

Democrats aren't exactly crying out for raising taxes now either. Not with approaching national elections and a restive electorate unhappy with levels of federal spending.

Obama's proposal to let the Bush tax cuts expire for families making over $250,000 or individuals earning above $200,000 will be woven into the upcoming presidential election. In emphasizing it now, rather than later, Obama all but assured that outcome.

Obama also is expected to call for other changes in the tax code, which he contends benefits the rich.

"Every corner of the federal government has to be looked at here," senior White House adviser David Plouffe says. "Revenues are going to have to be part of this." "Revenues" has always been Washington code for more taxes.

The bipartisan deficit-reduction commission appointed by Obama, led by Democrat Erskine Bowles and Republican Alan Simpson, called late last year for slashing about $4 trillion from budget deficits over the coming decade.

Roughly two-thirds of that would come through program cuts and one-third through increased taxes. Although overall tax rates would decline, dozens of popular tax breaks would be scaled back or eliminated, including the child tax credit, mortgage interest deduction and deduction claimed by employers who provide health insurance.

Obama praised the panel for its work, but embraced few of its recommendations, and none of the major ones on new taxes.

About the same time, another bipartisan panel headed by Republican Pete V. Domenici and Democrat Alice Rivlin came out with its own plan that would go even further -- getting roughly half of its deficit reductions from tax increases and half from spending cuts.

Rivlin, a former Federal Reserve vice chairwoman and budget director in the Clinton administration, says there's no other way than a mix. "It cannot be all on the spending side," she said.

Panels recommending tax increases haven't fared very well. When President George W. Bush's tax-code overhaul commission, chaired by former GOP Sen. Connie Mack of Florida, recommended big cuts in the cherished home mortgage deduction and other popular tax breaks in 2005, Bush gave it a cold shoulder.

Ever since Democratic presidential candidate Walter Mondale famously said in 1984 that, if elected, he would reluctantly raise taxes -- and promptly got clobbered in President Ronald Reagan's re-election landslide -- advocating tax increases has been dangerous territory for politicians of all stripes.

Reagan's "supply side" economics, the notion that tax cuts can pay for themselves and that lower taxes mean higher revenues, remains Republican gospel. No matter that few mainstream economists totally subscribe to that theory, or that Reagan proposed tax increases in every one of his eight years in office except the first.

"It's gotten much worse since then," suggests Bruce Bartlett, a domestic policy adviser to Reagan and a Treasury official under President George H. W. Bush. Bartlett cited the growing influence of unrelenting anti-tax advocates like Americans for Tax Reform and some within the tea party movement.

Bartlett said he's "enough of a libertarian" to wish that the nation's budget woes could indeed be solved by spending cuts alone. "But I just don't see how that's humanly possible, giving the aging of our society, the wars we're involved in and various other things."

This year's budget deficit is expected to be a record $1.6 trillion. But that's just for one year. Added to previous years' deficits, it brings the national debt to a shade under $14.3 trillion.

Annual deficits are expected to decline as the economy recovers from the worst downturn since the 1930s, but then climb again as millions of baby boomers qualify for government Social Security and Medicare benefits.