Tax code emerges as Democrats’ power tool

The Washington Times Weekly - - Politics - BY DAVID R. SANDS AND JON WARD

For the Obama ad­min­is­tra­tion and its Demo­cratic al­lies in Congress, the power to tax is in­creas­ingly be­com­ing the power to get their way on pol­icy mat­ters big and small.

From re­form­ing the na­tion’s health care sys­tem to help­ing vic­tims of Wall Street fraud mas­ter­mind Bernard Mad­off, the White House and Congress have turned to the tax code to push their pol­icy pri­or­i­ties. With Congress gear­ing up to tackle Pres­i­dent Obama’s pro­posed $1.5 tril­lion bud­get for fis­cal 2010, the tax bat­tles are cer­tain to in­ten­sify.

Us­ing the tax code to push a pres­i­den­tial agenda is noth­ing new. But with a bud­get that pro­poses ex­pen­sive and far-reach­ing re­forms in health care, en­ergy and ed­u­ca­tion, Mr. Obama has taken the tac­tic to a new level.

“Speak­ing very broadly, it’s pretty com­mon,” said J.D. Foster, a tax pol­icy an­a­lyst at the con­ser­va­tive Her­itage Foun­da­tion. “The tax code, from bow to stern, is full of poli­cies that are pro­posed by the pres­i­dent and con­gress­men that are in­tended to ma­nip­u­late the econ­omy or so­cial struc­tures and so­cial be­hav­ior.”

What is un­usual about Mr. Obama’s agenda, he said, is that “he is try­ing to re­design our na­tion in such broad strokes, cov­er­ing so many ar­eas at once.”

Robert Green­stein, ex­ec­u­tive di­rec­tor of the lib­eral Cen­ter on Bud­get and Pol­icy Pri­or­i­ties, praised the thrust of the Obama bud­get.

“All the tax in­creases ei­ther af­fect only peo­ple earn­ing more than $250,000 or close tax loop­holes that should not have been there in the first place,” he said, adding that the Obama bud­get would peel back the $120,000 av­er­age tax cut on those mak­ing more than $1 mil­lion, while the “vast ma­jor­ity” of small-busi­ness own­ers would ben­e­fit from the pres­i­dent’s health care re­form.

The ad­min­is­tra­tion looked to the tax code when try­ing to help vic­tims of Mad­off’s Ponzi scheme. The 20-year fraud, un­cov­ered in De­cem­ber, took in char­i­ties, hedge funds, uni­ver­si­ties and celebri­ties. The per­sonal sav­ings of many small in­vestors were wiped out.

The In­ter­nal Rev­enue Ser­vice an­nounced in March that the tax agency had is­sued two rul­ings in­tended to soften the losses for the thou­sands of in­di­vid­ual and in­sti­tu­tional in­vestors taken in by fi­nan­cial scams, such as the $64 bil­lion scheme op­er­ated by Mad­off.

The new guide­lines clar­ify rules let­ting vic­tims of Ponzi schemes claim “in­vest­ment theft losses” on their tax re­turns, al­low­ing for greater de­duc­tions than could be claimed un­der other types of cap­i­tal losses.

Con­gres­sional Democrats turned to the tax code again for a quick fix in the furor sur­round­ing bonuses paid to ex­ec­u­tives of in­sur­ance gi­ant Amer­i­can In­ter­na­tional Group Inc. The bonuses were paid af­ter the com­pany had ac­cepted more than $170 bil­lion in tax­payer aid to avoid bank­ruptcy.

The House of Rep­re­sen­ta­tives, af­ter just a cou­ple of hours of de­bate, passed a bill on March 19 to tax 90 per­cent of the bonuses granted to top earn­ers at AIG and any other com­pany that re­ceived more than $5 bil­lion in tax­payer bailout funds.

“By any mea­sure, you are disgraced pro­fes­sional losers,” Rep. Earl Pomeroy, North Dakota Demo­crat, said dur­ing the brief House de­bate. “And by the way, give us our money back.”

Jared Bern­stein, eco­nomic ad­viser to Vice Pres­i­dent Joseph R. Bi­den Jr., called the bill “a danger­ous way to go.”

“I think the pres­i­dent would be con­cerned that this bill may have some prob­lems in go­ing too far — the House bill may go too far in terms of some — some le­gal is­sues, con­sti­tu­tional va­lid­ity, us­ing the tax code to sur­gi­cally pun­ish a small group,” he said March 22 on ABC’s “This Week.”

But the re­sort to highly tar­geted taxes — even against such an un­pop­u­lar tar­get as AIG — has left oth­ers un­easy. “Peo­ple have to un­der­stand that us­ing the tax code for pu­n­ish­ment is a hor­ri­ble, dis­as­trous prece­dent,” said Rep. John Camp­bell, Cal­i­for­nia Repub­li­can.

“It’s ‘ev­ery­body grab the pitch­forks,’ “ said Sen. Judd Gregg, New Hamp­shire Repub­li­can and one of sev­eral law­mak­ers who warned that the AIG tax in­crease was un­con­sti­tu­tional.

As the ad­min­is­tra­tion searches for money to fund its big­gest cam­paign prom­ises, Mr. Obama has backed away from some pro­posed tax in­creases in the face of popu- lar op­po­si­tion.

The ad­min­is­tra­tion hastily dropped a pro­posal to re­quire some dis­abled vet­er­ans to pay for med­i­cal treat­ments through their pri­vate in­sur­ance com­pa­nies, heed­ing a cho­rus of out­rage from vet­er­ans groups and Capi­tol Hill law­mak­ers who said the idea was im­moral, un­con­scionable and unAmer­i­can.

The White House scrapped the plan af­ter meet­ing with a con­tin­gent of vet­er­ans and mil­i­tary ad­vo­cacy groups.

Con­ser­va­tive crit­ics say one of the most far-reach­ing tax changes in Mr. Obama’s bud­get in­volves greatly ex­pand­ing the prac­tice of giv­ing tax re­funds to low-in­come peo­ple who owe no taxes — “re­fund­able tax cred­its.”

“Obama’s ba­sic ethos that he ran on was that he wanted to spread the wealth, to take money from peo­ple that he per­ceived to have too much money and give it to peo­ple he per­ceived did not have enough money,” said Ryan El­lis, tax pol­icy di­rec­tor at Amer­i­cans for Tax Re­form, which pushes for lower taxes. “He’s very con­sciously us­ing re­fund­able cred­its a lot in or­der to give money to peo­ple that aren’t tax­pay­ers, which is a big deal.”

The dif­fer­ence be­tween a tax credit and a re­fund­able tax credit is that a nor­mal tax credit re­duces li­a­bil­ity down to zero. For ex­am­ple, if the re­fund­able credit is $500 and a tax­payer owes $300, the tax­payer re­ceives a $200 check from the gov­ern­ment.

Mr. Obama “wants to take ex­ist­ing cred­its in the code, bulk them up, and them make them re­fund­able,” Mr. El­lis said. “This is the way he’s spread­ing the wealth, do­ing his so­cial en­gi­neer­ing.”

David M. Dick­son trib­uted to this re­port.

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