Obama Mulls Tax Strategy on Rates, Estates, AMT

Washington Matters

Obama Mulls Tax Strategy on Rates, Estates, AMT

Expect an early signal from Obama to show he really will cut taxes on the middle class. At the same time, he's embracing John McCain's warning that it would be a disaster to raise taxes on anyone during a recession and delaying increases on wealthier Americans for at least a year. It'll all be laid out in another stimulus bill in January. 

After a smallish stimulus in the lame duck Congress this month -- one embracing jobless benefits, food stamps, aid to states and whatever else President Bush will agree to -- Obama and congressional Democrats will move quickly after Jan. 20 with a much bigger second stimulus focused on tax cuts.

Rebates are still possible, but they're losing favor. Instead, Obama wants to pass permanent tax cuts for the middle class that will show up quickly in the form of smaller tax deductions from workers' paychecks.That will allow him to fulfill an important campaign promise, while helping to boost the economy. Details are far from set, but the 2009 package is likely to include targeted tax credits for working families and the elderly and beefed-up credits for college students. The big fights will be over whether to provide money to those who don't pay income taxes by providing a "holiday" in payroll taxes. That will, in essence, be a replay of the campaign battle about "redistributing" the wealth.

Obama now seems willing to postpone his planned hike on couples making more than $250,000 a year at least through 2009. The same would go for his plan to raise the capital gains tax rate for high-incomers from 15% to 20%. Democrats could put Republicans on the spot by including language making lower rates for the middle class permanent while extending the Bush cuts on high incomers for only one-year. If that passes, Republicans will have almost no way to block the higher rates from taking effect down the line. Their only other option would be to hold the permanent middle class cuts hostage in exchange for permanent cuts on the upper incomers. That would be an awfully hard step to take politically.


To help pay for the cuts, Obama will push to keep the estate tax exemption at $3.5 million, with a rate of 45%, through 2010, a move that brings in about $26 billion.  Under current law, the estate tax disappears in 2010, but reappears in 2011 with a smaller exemption. The one-year fix buys time for lawmakers to devise a permanent plan for estate taxes. The solution is likely to be a continuation of the $3.5 million exemption, but the rate may rise as high as 55%.

Also likely in 2009, another temporary fix in the alternative minimum tax so its reach doesn't grow to include too many more middle income earners. 

Business will probably be left out of the mix. A lower corporate tax rate or a permanent research and development tax credit -- two high-agenda items for business -- would be offset by Obama with hikes that are unpalatable, such as eliminating the deduction for domestic manufacturing or taxing carried interest.