Obama to Propose Tougher Tax Regime for Wealthy

By DAMIAN PALETTA and CAROL E. LEE, WSJ

WASHINGTON -- The White House on Monday plans to launch an effort to prevent millionaires from paying lower tax rates than middle-class Americans as part of its package of ideas to reduce the federal deficit, two people familiar with the plan said.

The White House will likely try to use the plan, which aides call the "Buffett Rule" after billionaire Warren Buffett, to create a populist frame for the debate over deficit reduction that is likely to again consume Washington for the next few months. Democrats have pushed the White House in recent weeks to assert itself in the debt-ceiling talks in an effort to steal momentum away from Republicans.

The idea, which has been raised before by Democrats, is likely to be a non-starter with Republicans who had consistently opposed raising tax revenue as a way to tackle America's debt. The move is also evidence of how the work of the Congressional supercommittee, which is charged with devising a plan to cut the deficit, has become inextricably linked with the 2012 election season.

Few details about how such a plan would work could be learned, including whether there would be a new tax bracket at this elevated level. The White House is likely to urge congressional negotiators to use the concept as part of their talks, but isn't expected to go into great detail about how the new tax rule might work, people familiar with the plan said.

The general goal would be to prevent people earning more than a million dollars to pay taxes at a lower effective rate than people who earn under $250,000. That's often the case because investment income, or capital gains, is taxed at a lower rate than regular wages.

The plan will come as part of the White House's recommendations to a joint congressional panel that is charged with reducing the deficit by at least $1.2 trillion.

President Barack Obama is expected to call for a steeper reduction in the deficit. To reach that goal, Mr. Obama is expected to call for $300 billion in savings from changes to Medicare and Medicaid, a person familiar with the proposal said. He won't, though, call for changes to Social Security as a way of reducing the deficit.

On taxes, he'll call for lower, flatter tax rates, while also pushing for some tax increases. The White House has already proposed limits on the amount of tax deductions wealthy Americans can claim, and administration officials want tax rates to increase for families making more than $250,000 a year.

Recent White House plans have outlined between $1 trillion and $1.2 trillion in new taxes over 10 years. It's not clear how much money the new millionaire proposal would raise.

Top Obama administration officials have said any deficit-reduction efforts should be "balanced," Washington code for including tax increases as well as spending cuts, and say Republican proposals wouldn't require the wealthy to make major sacrifices.

Speaker of the House John Boehner (R., Ohio) said last week that tax increases were "off the table." Republicans have successfully beat back multiple previous efforts by the administration to raise tax rates. Republicans instead have called for an overhaul of the tax code that lowers rates while limiting some deductions as a way to spur job growth.

News of the new approach was first reported Saturday evening by the New York Times.

On Aug. 14, Mr. Buffett penned an op-ed in the New York Times titled "Stop Coddling the Rich," in which he described what he viewed as a tax code that has come to favor the wealthy. He said he paid federal taxes on 17.4% of his taxable income last year, a lower rate than any of the 20 other people in his office. He often remarks that he pays a lower tax rate than his secretary.

Messrs. Obama and Buffett spoke in late August during the president's vacation in Martha's Vineyard.

The White House could try to use the "Buffett Rule" in the same way they used the "Volcker Rule" in 2010. The Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, called for limiting how large banks trade using their own money, rather than that of their clients. The White House proposed it late in the process of overhauling Wall Street rules.

Even though the Volcker Rule is a bit arcane, it successfully ignited a populist firestorm that helped push the financial regulation bill into law. It put large banks and many of their supporters on the defensive, and they spent weeks trying to water down the language instead of trying to kill the bill outright.

When the White House proposed the Volcker Rule in 2010, it initially didn't provide specifics on how the plan would work. The administration is expected to follow a similar model with the Buffett Rule.

Targeting millionaires is a tactical move by the White House and comes after hard lessons learned by Democrats in 2010. Last year, the White House pushed to allow tax cuts enacted during the Bush administration to expire for families earning more than $250,000 a year.

Even though Democrats controlled the House and the Senate last year, the White House's effort faltered because it couldn't win enough support. Some Democrats instead said the White House should have pushed for allowing people who earn more than $1 million a year to have their tax rates increased.

The political dynamics have changed markedly since last year, though, with Republicans in control of the House of Representatives and Democrats holding a narrow majority in the Senate.

Monday's proposal will be at least the fourth different plan by the White House in the last seven months to reduce the deficit. It comes after a February budget proposal, an April speech at George Washington University that called for roughly $4 trillion in reductions over 12 years, and the debt-ceiling negotiations with Republicans in July that broke down over taxes.