Obama wants to debate overhaul of tax code

President Obama is interested in exploring a broad overhaul of the tax code along the lines recommended by the chairmen of his debt commission.

In an interview broadcast Friday on NPR, Obama said he was not endorsing the commission's plan, which would lower individual and corporate tax rates while eliminating $1 trillion in annual tax breaks. But he said he wants to start a bipartisan conversation on the idea next year.

"The idea is simplifying the system, hopefully lowering rates, broadening the base — that's something that I think most economists think would help us propel economic growth. But it's a very complicated conversation,” Obama said.

The tax code was last reformed in 1986 under President Reagan, a Republican who worked with a Democratic House on tax reform. The 1986 tax bill lowered rates while eliminating special breaks for individuals and businesses. 

Since then, Obama said, too many special-interest tax breaks have been built back into the system.

"What I believe is, is that we've got to start that conversation next year," Obama said. "I think we can get some broad bipartisan agreement that it needs to be done. But it's going to require a lot of hard work to actually make it happen."

An administration official said the tax reform ideas are now being examined under the direction of Assistant Treasury Secretary Michael Mundaca and Treasury adviser Gene Sperling.

Treasury and the President’s Economic Recovery Advisory Board previously had examined reforming corporate tax rates, but had not considered eliminating individual tax breaks and lowering individual rates as part of a deficit reduction package until the commission raised the idea, the official said.

The administration is also interested in employing firewalls in combination with discretionary spending caps to lower both security and non-security spending.

Rep. Paul Ryan (R-Wis.), who will head the House Budget Committee next year, expressed skepticism that the GOP-held House would be able to strike an agreement with Obama on tax reform.

"I don't know if we could get an agreement on a tax reform bill with the president or not," Ryan said of the prospects of tax reform in a video interview with The Wall Street Journal. "He plays the class warfare stuff so much, he talks about raising tax rates on all these people, which was the opposite direction we want to go.

"If Erskine Bowles was president of the United States, yeah, we'd have a tax reform deal in a week," Ryan added, referencing the Democratic co-chairman of Obama's fiscal commission. "But that's not the kind of Democrat we have in the White House right now."

Ryan also expressed skepticism about cutting defense spending, which he said could endanger national security.

The administration official said that the deficit commission report emphasizes that giving a carte blanche to security spending inevitably causes waste.

Obama would not specifically endorse one debt commission proposal: eliminating or scaling back the popular home mortgage tax deduction. Such a change could be painted as violating Obama's campaign pledge not to raise taxes on the middle class.

Members of the debt commission on Thursday urged the White House to begin bipartisan budget talks in January, but the White House has said that it wants first to put together its 2012 budget proposal.

Despite Ryan's comments, the idea of reforming the tax code is popular with Republicans and would provide an issue for Obama to cooperate with the GOP. Its inclusion in the debt commission report helped win the backing of Sens. Tom Coburn (R-Okla.) and Mike Crapo (R-Idaho). Interest groups like Americans for Tax Reform denounced the proposal as a tax increase.

Republicans want most or all of the revenue generated by eliminating tax breaks to be used to lower rates, while Democrats have said they want more of this revenue to pay down the national debt.

Obama said that a national discussion on spending cuts would accompany any bid for tax reform in the coming year. 

"We've got to look at a whole range of things — where the money goes," the president explained. "And that includes entitlements; that includes defense; that includes a whole host of discretionary spending where we can probably do more and do it smarter with less money, if we are actually making some tough choices."

The administration official said a likely next step will be for placeholder language for tax reform to appear in the Obama 2012 budget, with the details of the tax reform to be worked out in the following months. The deficit commission report recommends putting the new tax code in place by 2012.

Obama and congressional Republicans and Democrats are trying to finalize a tax-cut package that would extend tax cuts signed by President George W. Bush in 2001 and 2003. 

If Obama is able to get that deal through Congress, it would bode well for his ability to compromise in the coming months with Republicans on a deficit package that cuts spending and revises the tax code, the administration official said.


—This story was posted at 8:29 a.m. and last updated at 12:33 p.m.