In his State of the Union address Tuesday night, President Obama is expected to appeal for higher taxes on wealthy Americans – a theme that is both familiar and sharply at odds with his Republican rivals for the White House.
It is an issue that could play a central role in the debates leading up to the 2012 election, partly because tax policy – particularly for the rich – is one of the clearest economic-policy divides between Mr. Obama and Republicans.
Moreover, tax policy lies at the intersection of three issues voters care deeply about:
- How best to generate economic growth.
- What to do about huge federal deficits.
- Why living standards have been stagnating for the middle class while rising for the wealthy.
The president's pitch is, in essence, that the goals of job growth and asking the rich to pay their "fair share" can be achieved side by side.
Republicans counter that higher taxes are a recipe for slower economic growth, and for that reason Obama's plan would backfire in its goal of aiding middle-class Americans. Where Obama calls for taxing the rich more, GOP candidates have rolled out plans that would further reduce taxes on high-end earners.
This debate isn't new, but it is moving toward the election-year forefront as Obama uses his annual address to a joint session of Congress as a forum to lay out the vision for his reelection campaign.
Obama's speech coincides with Republican challenger Mitt Romney releasing his income-tax returns, which showed that the millionaire former businessman is taxed at a rate below 15 percent because much of his income comes from investments, not salary. That's lower than the rate paid by many families who consider themselves middle class.
"It’s wrong for Warren Buffett’s secretary to pay a higher tax rate than Warren Buffett," Obama said in a December speech in Osawatomie, Kan. "And by the way, Warren Buffett agrees with me. So do most Americans – Democrats, independents, and Republicans. And I know that many of our wealthiest citizens would agree to contribute a little more if it meant reducing the deficit and strengthening the economy that made their success possible."
Here's a hint that Americans who tune in Tuesday night will hear something like that again: The long-time secretary of Mr. Buffett, the Nebraska investor and billionaire, is scheduled to be a guest at the State of the Union address.
Between 1995 and 2008, the earnings of America's top 400 income-tax filers went up 276 percent to an average of $164 million in adjusted gross income. Their average tax rate during that same period fell by some 39 percent, to 18.1 percent of income in 2008, according to Internal Revenue Service data culled by journalists at Politifact.com.
At the same time, economic progress for the average American has faltered. Adjusted for inflation, the median household income of $49,445 is about $1,000 higher than it was in 1995, but it is down from levels seen between 1997 and 2009, according to the US Census Bureau.
"This isn’t about class warfare," Obama said in the Kansas speech. "This is about the nation’s welfare. It’s about making choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefits the middle class, and those fighting to get into the middle class, and the economy as a whole."
Some independent economists echo Obama's view that big tax cuts for high-income Americans in recent years have failed to generate widely shared gains throughout the economy. At the same time, other tax specialists agree with the conservative counterargument – that raising taxes on the rich would amount to a tax on many small businesses, thus dampening the economy's growth potential.
In an analysis last year, Curtis Dubay of the conservative Heritage Foundation concluded that tax hikes acted as a hindrance to economic growth during the early Clinton years, while tax cuts under President Bush helped to generate significant job gains prior to the recession. The late-1990s boom, Mr. Dubay said, coincided with a Clinton-era cut in capital-gains taxes.
But an October survey of 40 economists by the University of Chicago's Booth School rejected the idea that tax cuts "pay for themselves" by stimulating economic activity. The panel concluded that a modest hike in taxes for high-income earners would not be damaging but would in fact boost federal tax revenues.
The current tax debate comes after a big run-up in public debt under Mr. Bush and Obama. A continued rise in debt, as a share of the nation's economic output, poses its own threat to economic growth.
Cutting taxes further, as Republican presidential candidates propose, could add to the debt pile if they fail to cut federal spending by a similar amount.