In Wednesday's much-hyped verbal slugfest between Barack Obama and Mitt Romney, few topics will loom larger than taxes. They're a central battlefield for Republicans and Democrats, an area in which the two parties are fundamentally, philosophically divided. For much of the past four years, the Bush tax cuts, the capital gains tax rate, and the oft-repeated (and heavily spun) fact that 47% of Americans don't pay federal income tax have been at the heart of Washington's conflicts, and have often spilled over into other battles like the fights over health care reform and the debt ceiling.
Equally important, taxes are one subject upon which Obama and Romney are deeply divided personally. Romney has repeatedly and enthusiastically reiterated the Republican mantra that cutting taxes translates directly into economic growth. In his personal life, he has embodied that ideal, using a combination of deductions and preferential tax rates to keep his tax bill impressively low. In other words, when progressives take aim at tax reform, Romney is very much in the cross-hairs.
On Obama's side, the tax fight has left him with a political black eye. For years, he has endorsed plans to repeal the Bush-era tax cuts for the wealthy, while maintaining breaks for the poor and middle class. In this, he has been repeatedly stymied, which is one factor that led us to the fiscal cliff America is now peering over. His few tax-related victories, including the payroll tax holiday and the health care reform taxes, are modest, and his presidency has been plagued by his inability to significantly raise revenue.
With so much on the line, how will Obama and Romney frame the tax debate on Wednesday? Here are some likely talking points.
Taxes on the Middle Class
Most Americans define themselves as "middle class," and will likely respond to promises for economic help for that group. Any time a candidate can convincingly make the case that he is protecting the interests of the middle class, he will score points in the debate.
• What Obama Might Say: When it comes to middle class taxes, Obama has the option of resting on his laurels. The payroll tax holiday he championed in 2010 was a direct stimulus to the middle and lower classes, giving every earner making less than $110,000 per year what amounted to a 2% raise. But in January, that tax break is set to expire, along with Bush-era tax cuts that also benefit poor and middle class earners -- cuts Obama has repeatedly endorsed. For Obama, the best course may be to allow his record to speak for itself.
• What Romney Might Say: Romney's now-infamous attack on the 47% of Americans who don't pay federal income taxes hits a large number of middle class voters, a factor that Obama might well allude to in the debate. More importantly, the former governor's campaign has been extremely vague about its plans for middle class taxes. While Romney has proposed a 20% tax cut across the board, he has failed to explain in any detail how he would balance that out. According to many economists -- and notably, those at the nonpartisan Tax Policy Center -- Romney's plan is mathematically impossible: His tax cuts for the wealthy would either slash federal revenue or would have to be paid for by tax increases on the middle and lower classes.
Rather than focusing his efforts on rebutting those points or providing details about his plans, Romney has focused on discussing what Obama "might" do. In a campaign stop last week, he told his audience, "I admit this, he has one thing he did not do in his first four years, he's said he's going to do in his next four years, which is to raise taxes." On Wednesday, Romney is likely to continue down that path, attempting to shift the focus from Obama's record to his rhetoric.
• Potential Pitfalls: If Romney hopes to sell his tax plan, he needs to convincingly describe how he can offer tax breaks for the rich without picking everyone else's pockets. Thus far, he has avoided this battle by parsing the definition of "middle class," avoiding specifics on his tax proposal, and trying to redirect the discussion back to Obama. However, to sway moderates, he'll ultimately need to make his case clearly and effectively.
Taxes on the Wealthy
Taxes on the wealthiest Americans are near historic lows, which has resulted in a massive revenue shortfall for the government. Further, the outsized political voice granted to the ultra-rich by the Supreme Court's Citizens United decision means that neither candidate can afford to disregard the wealthiest 1%. Here are some ways that they might navigate this tricky -- and powerful -- segment of voters.
• What Obama Might Say: When it comes to dealing with the rich, Obama has had a long, difficult learning curve. In late 2010, he attempted to allow the Bush tax cuts on upper-income earners to expire. Ultimately, however, Congress compromised on a bill that retained all the tax cuts, including those benefiting the wealthiest taxpayers. Obama's later attempt to push a "Buffett Rule" that would raise taxes on millionaires was stalled by congressional Republicans.
As things stand, the Bush tax cuts on the wealthy will expire in January 2013, along with the 15% carried interest tax break, the current low capital gains and dividend tax rates, and the highly favorable inheritance tax rate -- all of which primarily benefit the rich. Obama has already begun a tentative outreach toward the wealthy, releasing a two-minute "Economic Patriotism" video centered on the idea that paying higher tax rates is a way for the rich to show their love for America. He may refer to this idea in the debates.
• What Romney Might Say: For Romney, taxes on the wealthy are a comfortable topic. His much-touted 14.1% 2011 tax rate demonstrates a familiarity with -- and tacit endorsement of -- the tax breaks available to the upper class, and his proposed 20% tax cut should more than seal the deal with asset-centric wealthy voters.
• Potential Pitfalls: As the campaign season peaks, things will get expensive for both candidates, and it would be in Obama's best interests to reach out to the wealthy. But even if his notion of economic patriotism falls as flat with the rich as his earlier "shared sacrifice" push did, it might still be a big seller with middle class voters.
Closing Tax Loopholes
While debates over taxes usually focus on the income tax rate, the real action might be on deductions, credits, and other loopholes that Americans use to lower their real tax rates. Cuts to these tax breaks, while less transparent than changes to tax brackets, could be the centerpiece of both Obama and Romney's tax strategies.
• What Romney Might Say: For Romney, loopholes could be a delicate issue. He asserts that his proposed 20% tax cut would largely be funded by closing loopholes for the rich, but has remained vague about how exactly this would be accomplished. This lack of clarity has already caused him some trouble, as the nonpartisan Tax Policy Center has determined that his numbers don't add up. Right now, his most likely path will be to stick with his assertion that his tax cuts won't increase taxes on the middle class, while trying to avoid discussing specifics.
• What Obama Might Say: For weeks, Obama pushed the Romney campaign to release details about which tax loopholes it plans to close. Recently, however, the president shifted focus; last week, he and Vice President Biden both suggested that Romney plans to cut the mortgage interest deduction, reduce dependent deductions, and begin taxing Social Security benefits. These three points, calculated to strike terror into middle-class hearts, paint Romney into a corner. If the Republican challenger ignores Obama's goads, he will be implicitly agreeing with them. To repudiate them, he will need to explain which loopholes he plans to close -- a path that is similarly fraught with peril.
• Potential Pitfalls: If Obama goes on the attack with Romney's loophole issues, he runs the risk of overplaying his hand, a move that could backfire. The Republican challenger, on the other hand, faces an even bigger problem: If he stays mum on the specifics of his tax plan, he could appear unprepared and unserious, but if he offers specifics, he may well offend potential voters. Caught between a rock and a hard place, a large part of the drama of Wednesday's debate will revolve around how Romney attempts to extricate himself from this trap.
Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at firstname.lastname@example.org, or follow him on Twitter at @bruce1971.