President Barack Obama’s plan for billions of dollars in tax
increases and higher government spending, to be outlined in Tuesday’s State of
the Union address, is reigniting familiar partisan debates about overhauling
the tax code and how to best aid the middle class. The White House views Mr.
Obama’s proposals as the start of a broad discussion with the new Republican
Congress over a rewrite of the tax code that includes not just corporate but
individual taxation, as GOP lawmakers have wanted. But in calling for tax
increases, the White House may have complicated negotiations on an issue that
both parties recently cited as ripe for compromise.
Mr. Obama surprised Republican leaders when the White House
announced over the weekend that he will propose some $320 billion in tax
increases over 10 years that are targeted at high-income Americans, and to use
that money to pay for $235 billion in tax breaks mostly for moderate-income
workers, plus other yet-unspecified initiatives.
The plan would increase taxes on investments held by
high-income households by boosting top capital-gains tax rates and imposing
capital-gains tax on many inherited assets. Republicans, who control the House
and Senate, have balked at the president’s plan, calling it the type of
redistribution of wealth that Mr. Obama has long known Republicans oppose. But
like Mr. Obama, Republican congressional leaders, as well as some potential GOP
2016 presidential candidates, have said they want to more directly address the
economic anxiety that persists despite a growing economy and falling jobless
So far, most of the attention among Republicans has been on
lifting incomes of working families by boosting economic growth, though some in
the GOP are proposing federal programs and tax plans. Sen. Marco Rubio of
Florida has called for increasing the child tax credit and creating a monthly
credit for low-income earners, while Sen. Rand Paul of Kentucky
proposes tax breaks to promote investment in poor communities.
Democrats generally praised Mr. Obama’s plan as rightly
focused on the middle class and sluggish wage growth, although Mr. Obama is
seeking only about half of the minimum of $1 trillion in tax increases some in
his party want. The White House hopes, at minimum, that Mr. Obama’s proposals
put political pressure on Republicans to come up with their own plans. The
president’s ideas could also soothe lawmakers in his own party who are being
asked by the White House to support new trade pacts they oppose.
Mr. Obama’s annual address to the nation Tuesday night
appears designed to cement a legacy as an economic populist and provide a road
map for Democratic candidates looking to rouse middle-class support in the 2016
Republicans already are irked by the president’s threats to
veto two of the first pieces of legislation the new GOP-controlled Congress is
considering: approving the Keystone XL pipeline and altering the Affordable
Care Act. Some in the GOP said the president’s tax plan underscores a growing
view that Mr. Obama appears unwilling to make significant compromises.
The White House said parts of Mr. Obama’s plan are modeled
after Republican ideas, including a new fee on large banks and a tax break for
households where two spouses work.
While Republicans rejected Mr. Obama’s tax plan, some said
hopes for a deal weren’t extinguished. Most
of the GOP opposition stems from the plan to boost taxes on investment income,
which Republicans say would harm economic growth by discouraging business
investment and thereby hurt workers’ incomes.
Mr. Obama in his new proposal focuses on individual taxes,
as opposed to the corporate tax code, at a time when broader consensus exists
on the problems and solutions for the latter. Still, many Republicans have been
wary of pursuing a business-only tax rewrite, in part because it could leave
them vulnerable to charges that they are catering to corporations and the
Mr. Obama’s plan would boost the top rate on capital gains
to 28% from the current 23.8%. That is the rate paid by roughly the top 1% of
earners, such as married couples making more than about $500,000. The plan also
would impose capital-gains tax on many inherited assets, a move that the
administration said would also fall largely on the wealthy.
Republicans continue to argue that across-the-board rate
cuts are the best way to boost the economy. The proposed redistribution of
wealth that would occur under the White House plan breeds resentment toward the
highest earners, Republicans say, when they are often the most likely to be
creating new jobs.
Administration aides said Mr. Obama—who succeeded in forcing
significant increases in taxes on high-income households just after his 2012
re-election—still hopes to find common ground with GOP lawmakers on a
comprehensive rewrite of the U.S. tax code, for both individuals and
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