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Are Higher Tax Rates Back on the Table?

Paul Ryan steered clear of raising income taxes in the budget proposal he floated last week. Instead, the GOP's alpha fiscal hawk wants to rein in our debt and deficit through $6 trillion in spending cuts alone. While Ryan's budget sucked up all the oxygen in Washington and the blogosphere when it was released, the reality is that it's just one proposal. And a few other major stakeholders are getting ready to put income tax hikes back on the negotiating table.

Obama Plan 2.0
In a speech scheduled for tomorrow, President Obama is expected to start anew his push to raise income tax rates on the wealthy. Way back in 2010 when the raging debate was what to do about the soon-to-expire Bush tax cuts, the President was pushing for a deal that would leave rates in place for most Americans, but increase the rates for households with income above $250,000 (or individuals with income above $200,000). His plan then was to raise the top two income tax brackets of 33 percent and 35 percent to their pre-Bush rates of 36 percent and 39.6 percent. As you may remember, the president punted in a tax deal last December that extended all the Bush tax cuts through 2012.

The president resurrected his higher-tax plan in the 2012 budget proposal he submitted in February, and White House senior adviser David Plouffe telegraphed on this past Sunday's talk show circuit that President Obama clearly intends to put higher income tax rates back on the table.

The Deficit Commission Comes Back into Play

In addition, it looks like some variant of last fall's deficit reduction proposal presented by the National Commission on Fiscal Reform -- aka, the president's commission led by Alan Simpson and Erskine Bowles -- could grab a seat at the negotiating table. Yes, the same proposal that didn't have enough backing to force a vote in Congress, and was pretty much ignored by President Obama, may live another day. A bipartisan group of Senators, nicknamed the "Gang of Six," has been plugging away at their own budget proposal that may get floated in the coming days. The group is reportedly using the deficit commission's tax plan as a template for its own proposal.

The key tax elements of the deficit commission plan, which sought to trim $4 trillion in federal spending over the next decade, were to simplify the individual tax code into three basic brackets with a top rate below 28 percent, while simultaneously eliminating or drastically scaling back most itemized deductions. For example, the mortgage interest deduction would be replaced by a 12 percent credit for all homeowners, but only for mortgages below $500,000 used to finance primary residences. Capital gains and qualified dividends, which now are taxed at a top rate of 15 percent, would instead be taxed as ordinary income under one version of the commission's plan.

No surprise, the bulk of these changes would have the biggest impact on higher income households. An analysis by the Tax Policy Center estimated the overall average federal tax bill would rise about $1,800 a year in 2020, but among the highest income quintile -- average income of $317,385 -- the increase in the federal tax bill would be around $9,500.

And Entering from the Far Left...
The ideological counterweight to the Ryan proposal that views any tax increase as a job destroyer is a bill introduced last month by democratic Representative Jan Schakowsky that would impose much higher rates on the wealthy. Schakowsky, a member of the president's fiscal commission, sets $1 million as her line in the sand for what constitutes wealthy.

The proposed income tax rates in Schakowsky's Fairness in Taxation Act are as follows:

  • Income between $1 million-$10 million: 45 percent
  • Income between $10 million-$20 million: 46 percent
  • Income between $20 million-$100 million: 47 percent
  • Income between $100 million-$1 billion: 48 percent
  • Income over $1 billion: 49 percent

A Brief Recap
We're going to need a scorecard to keep track of all the players in the building tax debate. So far we have the Ryan budget proposal that does not raise income taxes. President Obama is gearing up to push again for his call to raise taxes on households with income above $250,000. There may also soon be a bipartisan plan from the Gang of Six that could borrow heavily from the work of the President's own bipartisan deficit commission and simplify the tax code. And we've also got a progressive proposal to ratchet up income tax rates on the uber wealthy. And there may be more plans to come, as we're barely in the top of the first inning here.

What's Ahead
The wide divergence in Washington over if, or to what extent, to raise individual income taxes could make the recent negotiations over averting the government shutdown seem like a round of kumbaya. And it's unlikely that this is going to get settled before the 2012 presidential election. A new survey of more than 50 economists by the Wall Street Journal found that nearly 90 percent expect tax rates to rise in the next five years; 84 percent expect it to happen after the 2012 election.

But what passes as political expediency -- don't raise taxes in an election year! -- just might shortchange the intelligence of the electorate. As MoneyWatch's Eric Schurenberg recently explained, a detailed study found that when average Americans -- spanning all party affiliations -- are given the facts of what's at play, the vast majority are fully on board that raising taxes is part of the solution to our fiscal problems. But before we get there, we're likely in for a very taxing debate in Washington.

Photo courtesy Flickr user johnmorgan

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