Congress to Obama: Not So Fast

Just days after President Obama outlined his proposed budget, which includes tax modifications (yeah, it’s a cheesy word, keep reading) for high wage earners, key leaders in Congress are making noise that they might not be in support of the plan. Chief among them is Senate Finance Committee Chairman Max Baucus (D-MT) who questioned whether the plan would work.

The White House is touting the plan as necessary to make a dent in a spiraling deficit and to pay for the cost of health care reform. At least half of the funds for those are expected to come from revenue raised from the tax increase.

But is it a tax increase? Phase one of the plan is to increase the top tax rate on individual taxpayers earning more than $200,000 and married taxpayers making more than $250,000 from 35% to 39.6%. Opponents of the increase say that Obama is singling out successful taxpayers. But the White House is careful to point out that the “increase” is actually the result of the expiration of a tax cut enacted under President Bush. The Bush tax cuts were not made permanent and are scheduled to sunset back to the original rates in 2011. In other words, those rates will increase if Congress doesn’t do anything at all (a pretty good bet).

More problematic for the Obama administration is the plan to limit deductions. As previously blogged, the White House has proposed limiting deductions for charitable donations, mortgage interest and state and local taxes. Under the current rate structure, taxpayers in a 35% tax bracket save $350 for each corresponding $1000 in deductions. Reducing the deduction limit to 28% means that taxpayers in the highest brackets would lose $70 in tax savings for each $1000 in deductions. Interestingly, these are the same deduction limits that were in effect during the Reagan years (though the top rates were lower).

Republicans have criticized the plan, citing concerns about the effects on charitable donations. Democrats have echoed these concerns, making it clear that the proposal is by no means a done deal.

Here’s my prediction: Congress does nothing. Sure, that’s a good prediction at the best of times. But this time, I’m serious. If Congress does nothing, the top rates go up anyway and the deductions remain at their current rates. Voila! Congress at work.