Obama Tackles Taxes

With congressional talks collapsed, the president is personally stepping in to cut a deal. Daniel Stone on the last major stumbling block—how to raise revenue without using the word “tax.”

June 27, 2011 12:34 PM EDT

With just over five weeks until the looming August deadline when the U.S. will begin to default on its debts, the White House kicked up its participation this week, inserting the president into the fragile negotiations.

Before congressional talks fell apart last week, there were a few things that Democratic and Republican leaders agreed on. One was the need to rein in about $150 billion in spending for big-ticket items likedefense and ongoing economic stimulus. Another was to reduce hurdles to job creation and economic growth.

But the talks, guided by Vice President Joe Biden, fizzled when senior Republicans walked out Thursday night over the threat of increased taxes for successful corporations and wealthy individuals. “What we object to is changing the tax code,” Republican Sen. Jon Kyl said on Fox News Sunday, diagnosing the talks’ demise. “We don't need new taxes right now. We need to reduce spending."

Obama was meeting Monday morning with Senate Majority Leader Harry Reid, his opening foray. West Wing staffers were then planning to work the phones and tally their math before bringing Minority Leader Mitch McConnell into the Oval Office for Obama to make the closing sell in the late afternoon. The process would be repeated, with House leaders as well, as many times over the next few weeks as necessary.

Yet the difference between the two sides at this point isn't the size of cuts or where they come from. It’s on the revenue side of the balance sheet, in order to pay back the debt faster—specifically by raising taxes.

Neither party has used the dreaded two-word phrase in their package of wants. And neither side has actually proposed a straight-up income-tax increase for either average earners or the wealthy. The Bush tax cuts that Congress extended last fall don’t expire until the end of December 2012, a comfortable two months after the next election.

The rawness of the debate has centered on what actually constitutes raising people’s taxes.”

Olivier Douliery / Getty Images

But the rawness of the debate has centered on what actually constitutes raising people’s taxes. Democrats—who want things like mortgage deductions for families that make over $500,000 each year, and to cut off subsidies for oil and gas companies with soaring profits—have claimed that amending the tax code to eliminate subsidies and incentives doesn’t actually constitute a tax increase, but rather is just a return to their normal tax rates without government help.

But Republicans, led by House Majority Leader Eric Cantor, have insisted that the ultimate effect would be an increase in taxes that companies and wealthy individuals owe to the government, constraining growth and potentially costing jobs.

It’s a semantic difference with not a lot of middle ground. Yet a congressional staffer close to the negotiations says that an eventual agreement may hinge on an even smaller technicality. With Republicans opposed to new taxes, several have expressed openness to new “fees”—things associated with voluntary actions that strained investors or industries could avoid. At the moment, however, few members involved in the talks have been willing to outline specific new fees that could be included.

Such minutiae could fall to Obama, whose aides may be tasked with scoping new forms of uncontroversial revenue that could pass muster with Republicans. Negotiators have already wrung as much agreement as possible by inspecting the nation’s budget and tax code. The only book that would be useful now might be a dictionary.