Tax code escalates as Dems’ tool

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.

Corrected: 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 $3.6 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.

See related story:Obama cool to high tax on bonuses

“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 last week 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 Thursday 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. The Senate may take up its own confiscatory tax bill targeting AIG as early as this week.

“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.”

Mr. Obama has not said whether he would sign the measure if it reaches his desk.

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