Obama budget sets stage for battle over tax hikes

WASHINGTON - President Barack Obama proposed tax increases on wealthy individuals and some corporations Monday, setting the stage for an ideological battle that won't be resolved until after the November election - if then.

Obama's proposed tax hikes put him at odds with the Republican presidential hopefuls. They have all called for tax packages that would lower taxes but possibly add to the federal deficit.

Obama's 2013 budget proposal mixes tax cuts designed to improve the economy with long-term tax increases aimed at reducing the federal budget deficit.

The plan calls for a tax reform package that would increase revenue by $1.5 trillion over the next decade. Obama did not offer a detailed plan for tax reform. Instead, he proposed a series of changes to the current tax system and several principles for what comprehensive tax reform would look like.

Administration officials said Monday that Obama would release a framework for corporate tax reform by the end of the month. The top corporate income tax rate of 35 percent is among the highest in the industrialized world. But the system is filled with so many deductions, credits and exemptions that many corporations pay taxes at a much lower rate.

Obama says he wants to simplify the tax code, lowering marginal tax rates while eliminating or reducing tax breaks enjoyed by wealthy individuals and U.S.-based multinational corporations.

Obama's plan would allow Bush-era tax cuts for the wealthy to expire at the end of the year, and would impose a new rule that people making more than $1 million a year pay at least 30 percent of their income in taxes. The "Buffett" rule, named after billionaire investor Warren Buffett, would replace the alternative minimum tax, which was originally designed to ensure that wealthy families pay at least some tax.

Obama did not detail how the Buffett rule would work. He said it should be a guiding principle for comprehensive tax reform.

"I believe that in our country, everyone must shoulder their fair share - especially those who have benefited the most from our economy," Obama said in his budget message. "In the United States of America, a teacher, a nurse, or a construction worker who earns $50,000 a year should not pay taxes at a higher rate than somebody making $50 million. That is wrong."

Obama's tax proposals have no chance of passing a divided Congress in which most Republicans oppose all tax increases. Obama has included many of them in previous budget proposals, only to have them ignored by Congress.

Instead, Congress appears headed for another year-end showdown over whether to extend tax cuts first enacted under former President George W. Bush.

"The president offered a partisan, election-year budget that ratchets up spending while ignoring the biggest drivers of our debt and calls for massive tax increases on hardworking families and small businesses," said House Majority Leader Eric Cantor, R-Va.

The tax cuts, which expire at the end of the year, affect taxpayers at every income level. Obama wants to extend them for individuals making less than $200,000 a year and married couples making less than $250,000. He wants to let the tax cuts expire for those who make more.

Obama's plan would increase the taxes on qualified dividends for the wealthiest investors. The top tax rate on qualified dividends is currently 15 percent. For the wealthiest investors, Obama would tax them at the same rate as ordinary income, with a top rate of 39.6 percent.

Obama's rivals, including former Massachusetts Gov. Mitt Romney, have proposed tax plans that independent experts say would result in lower taxes for corporations and the wealthy.

Romney's tax plan would make permanent all of the Bush-era tax cuts, including those for the wealthy. Romney's plan, however, would reduce revenue by $180 billion in 2015, adding to the federal budget deficit, according to an analysis by the Tax Policy Center, a Washington think tank.

Romney's campaign disputes the estimate, saying tax cuts in the plan would help improve the economy, leading to more revenue.

Among Obama's tax proposals:

• Make permanent the American Opportunity Tax Credit, which provides students with up to $2,500 a year for college expenses, saving taxpayers $137 billion over the next decade.

• Enhance and make permanent the research and experimentation tax credit, saving businesses $109 billion over the next decade.

• Extend through 2012 a provision that allows businesses to more quickly write off the cost of new equipment such as computers, saving them $31 billion over the next decade.

• Provide a tax credit for employers that increase their payrolls in 2012. Employers could get a tax credit equal to 10 percent of the increase in wages subject to Social Security taxes. The tax credit would save businesses $18 billion.

• Raise $143 billion over the next decade by increasing estate and gift taxes, and changing the way some trusts are taxed.

• Increase taxes on U.S.-based multinational corporations by $148 billion over the next decade, in part by changing the way foreign tax credits are calculated and restricting the ability to defer taxes on foreign profits by limiting deductions for interest expenses.

• Raise $61 billion over the next decade by imposing a fee on financial institutions with more than $50 billion in assets. The fee, which is designed to recover the costs of the Wall Street bailout, would be based on the covered liabilities of a financial firm.

• Raise $30 billion over the next decade by eliminating tax breaks for oil, gas and coal companies.

• Raise $87 billion over the next decade by requiring businesses to change the way they value their inventory for tax purposes.