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Obama fights a cut for wealthy

Pushes to keep tax breaks for middle class

By Mark Arsenault and Donovan Slack
Globe Staff / September 9, 2010

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WASHINGTON — President Obama, whose party is facing a potential midterm disaster under relentless Republican assaults on his economic record, launched an ambitious effort yesterday to cast Democrats as populists who want to end tax breaks for the wealthiest Americans but save them for the middle class.

At stake are billions of dollars of Bush-era tax cuts set to expire at the end of this year unless Congress takes action. Obama yesterday emphatically called for keeping the cuts for the vast majority of Americans but letting them expire for families earning $250,000 or more, and individuals earning $200,000 or more.

If the president gets his way, some 111,000 tax filers in Massachusetts — the wealthiest 3 percent — would see their rates go up to what they were under the Clinton administration. The rest of the state would be able to keep the tax cut. For middle-income families, that amounts to an average of about $1,800 in their pockets each year.

The president seized on the issue two months before the midterm elections, trying to define the terms of the taxation debate as a question of balancing fiscal responsibility and relief for struggling families.

“We should not hold middle-class tax cuts hostage any longer,’’ Obama said in a speech near Cleveland. “We are ready, this week . . . to give tax cuts to every American making $250,000 or less. That’s 98, 97 percent of Americans.

“This isn’t to punish folks who are better off — God bless them. It’s because we can’t afford the $700 billion price tag,’’ the estimated 10-year cost of extending the tax cuts for the higher wage earners, the president said.

But Republicans, striking back, cited an op-ed written by Obama’s former budget director, Peter Orszag, who suggested a compromise to extend all the tax cuts two years before ending them.

“If the president is serious about finally focusing on jobs,’’ said House Minority Leader John Boehner, in a statement, “a good start would be taking the advice of his recently departed budget director and freeze all tax rates, coupled with putting federal spending back to where it was before all of the bailouts, stimulus, and takeovers.’’

Republicans have also contended that allowing taxes to rise on top earners would hurt some owners of small businesses that are key to restoring the economy’s health.

Under Obama’s plan, the 33 percent income tax bracket would return to 35 percent, and the 36 percent bracket to 39.6 percent. The plan would also limit some deductions for higher earners and impose a higher tax on investment income.

For Massachusetts taxpayers, the stakes are high. If the president’s plan passes, the resulting increase would affect 20,801 individuals who earned more than $200,000 and 89,898 local families with incomes greater than $250,000, according to the most recent tax data from the state Department of Revenue. Together, those groups make up 3.2 percent of all taxpayers in Massachusetts.

Middle-class taxpayers would get to keep the benefits of the existing tax cut. For families whose total incomes range from $66,000 to $97,000, that would mean an average savings of $1,831, according to a prediction in a recently released study by the nonpartisan Tax Foundation.

In dollar terms, Massachusetts taxpayers have more at stake than residents of any state except Alaska, New Jersey, and Connecticut, according to the foundation.

The Obama administration, which estimated the cost of keeping tax cuts for the middle class would be about $2 trillion through 2020, is counting on Democratic leaders to pass the extension through a fractious and bitterly partisan Congress.

So far this election season, unemployment and the slow pace of the nation’s economic recovery have been the dominant campaign issues, to the detriment of Democrats. Polls suggest that an angry electorate is looking to vent its frustration, which puts Democrats’ control of the House and possibly the Senate in jeopardy. Republicans have cast Obama’s economic policies as wasteful and ineffective.

Yesterday, the president ended any speculation that he might back off his campaign pledge to let the tax cuts expire for the wealthy. Some lawmakers, including Democrats, had suggested any tax increase could torpedo an already foundering economy. Obama rejected that argument, saying fiscal discipline and tax fairness demanded an end to those cuts.

With his aggressive and often baldly partisan speech, Obama also continued to pound on his recent campaign theme that Republicans will return the country to “the same failed policies that ran our economy into a ditch.’’

In showcasing the tax issue, Obama is seeking to turn the argument over the economy away from the hard employment numbers in a series of weak job reports and toward the emotional issue of economic fairness, and what he suggests is the Republican Party’s consistent defense of the wealthy.

Eliminating the tax cut for the highest wage earners could be a significant issue for Democrats this fall, said political strategist Steve Hildebrand, who was deputy national campaign manager for Obama’s presidential run in 2008.

“I think it’s an issue the vast majority of Americans believe was unfair from the beginning,’’ said Hildebrand. “There’s a lot more middle-income voters in this country than there are rich voters. From a political standpoint, I think this is a no-brainer.’’

Republicans counter that any tax increase would threaten growth and the economy. The one Massachusetts Republican in federal office, US Senator Scott Brown, was among a number of Republicans yesterday warning that the consequences of allowing any of the tax cuts to expire could be crippling.

“Raising taxes will kill jobs and slow down an economic recovery,’’ said Brown’s spokesperson, Gail Gitcho.

By elevating the issue with a high-profile speech, the president may have gained a political and rhetorical advantage, but that may not translate into action in Congress, said Thomas Mann, who studies government at the Brookings Institution, a Washington think tank.

“Any [Republican] compromise with Obama on taxes would be seen by Tea Party activists as selling out to the devil,’’ Mann said.

US Representative Richard Neal, a Massachusetts Democrat who sits on the House Ways and Means Committee, where any measure to extend the tax cuts must pass, said he agrees with the president but is keeping an open mind until Congress returns to session next week.

“I’m willing to see what the picture looks like when we get back,’’ he said yesterday.

Another Bay State Democrat, US Representative Barney Frank, chairman of the Financial Services Committee, dismissed Republican assertions that allowing the tax cut for higher-wage earners to expire would hurt the economy. “The notion that people making $300-, $400-, $500,000 dollars a year will work less because they’re paying more taxes, it’s just wrong, it’s counterintuitive,’’ Frank said.

Mark Arsenault can be reached at marsenault@globe.com. Donovan Slack can be reached at dslack@globe.com.