Fineman: Obama's No-New-Taxes Corner

By Howard Fineman
|  Wednesday, Sep 29, 2010  |  Updated 7:41 PM CDT
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Health Care Bill Poses Tax Problem For Obama

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It appears the only way to pass the giant health care bill is to look for ways to tax. Will President Obama break the tax-the-rich piggy bank to pay for health care?

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WASHINGTON - Glory and honor aside, politics is about one thing: taxes. President Obama’s State of the Union predicament is an example.

As he prepares the speech that will summarize his first year in office — coinciding with the unveiling of his budget in early February — Obama has a problem: he has to propose more new taxes than he wants, but hasn’t decided which ones to choose.

This is an uncomfortable — not to say politically dangerous — position for any president to be in, especially one already at risk of being labeled by many independents as just another tax-and-spend Democrat.

Obama’s situation is made more difficult by the health care crusade that has become such a mixed blessing in his first year.

He vowed that the health care overhaul would not cost the Treasury money — indeed, that it would save money in the long run. But as he looks for ways to satisfy the left wing of his own party by increasing benefits and subsidies for coverage, it looks increasingly like the final bill will do neither, at least in its first decade.

So now the president is in a bind. He needs to find more revenue to pay for the health care overhaul, but he also has to assure the bond markets that we will have the discipline — and the money — to repay what we have borrowed from the world and our descendants. That is the message his new budget is supposed to convey.

To help pay for health care, Obama chose to back the idea of raising $150 billion with an excise tax on the value of so-called “Cadillac” health insurance plans purchased by companies or individuals.

Academic experts say the tax would save money by imposing greater cost consciousness; labor unions are vehemently opposed, and AFL-CIO President Rich Trumka on Monday told the president so.

Obama told Trumka that he would reconsider the idea. But I doubt that he will abandon it. One reason why is that he may well want to use another health care financing idea for general deficit reduction; that idea is a surtax on individual income above $500,000 and family income above $1 million.

The “hit the rich” tax would generate a whopping $450 billion over ten years. It’s a fat budgetary piggy bank, but one you can only break once. “You can only tax `rich people’ so many times before you run out revenue, “ said Maya MacGuineas of the Committee. “Once you do the surtax, that’s it. You can’t use it twice.”

Obama is in a tighter bind because of previous pledges and decisions. In 2008 and early in his presidency, he promised not to raise taxes on families earning less than $250,000 and he decided to extend most of George W. Bush’s 2001 and 2003 tax cuts.

Violating those pledges would make the Democrats’ political situation even more perilous among swing-state and swing-district voters. On its face, the surtax would not violate the pledge.

The president also knows that there are economic reasons for caution on taxes. He and his circle accept some measure of supply-side thinking. The new buzz phrase around the White House is “de-stimulative” — that is, as the country struggles to emerge from recession, you don’t want to raise taxes or cut spending in ways that weaken the stimulative powers of government.

So besides the surtax, where is he going to get the revenue to start paying down the massive debt that exploded during the Bush Years?

The White House and its outside advisors are floating several ideas:

  • A new tax on bank transactions, which would raise $120 billion over ten years, focused on big banks that received TARP money. The early accounts of this focus on how it would allow the Obama White House to win points for attacking the banks, but the real reason to do it is to help the budget bottom line.
  • Leave the capital-gains tax rate at 15 percent, but cap the income-level of those taking it.
  • Further increase Medicare payroll taxes (even beyond what is in the health care bill) for high-income individuals and families.
  • A “transaction” tax on stock trades.

This last prospect has faded, I am told, but Obama insiders haven’t stopped touting it around town. Since it would be applied to brokers — and to hedge fund transactions — it is attractive politically. It would not be a direct tax on individuals or families, but would allow Obama to go after unpopular Wall Street traders. The bank-transaction tax has the same populist appeal.

 

“Politically, it’s a good narrative,” said MacGuineas.

It’s a narrative you can expect to hear when the president steps to the podium in the House of Representatives for the State of the Union. But the real narrative is this: his struggle to make the numbers add up, not only for this year, but for the generation to come.

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