Obama focuses on tax reform to end inequalities

US President Barack Obama (C) delivers his State of the Union address to a joint session of Congress, as Vice President Joe Biden (L) and House Speaker John Boehner (R-OH) look on, on Capitol Hill in Washington, January 24, 2012. (REUTERS)

President Barack Obama will frame an election-year State of the Union address on Tuesday in starkly populist terms by calling for sweeping tax reforms to get rid of inequalities that allow the wealthy to pay a lower rate than middle-class Americans.

Obama's message could resonate in his campaign for re-election in November following the release of tax records by Mitt Romney, a potential Republican rival and one of the wealthiest men to ever run for the White House.

Romney pays a lower effective tax rate than many top wage-earners.

"Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that does the same," Obama said in advance excerpts for his 9 p.m. EST (0200 GMT Wednesday) speech to Congress.

"It's time to apply the same rules from top to bottom: No bailouts, no handouts and no copouts," he will say.

Taxes are the most divisive issue at the heart of this year's election campaign. Obama, seeking a second term despite a slow economic recovery and a high jobless rate, hopes to tap into middle-class voters' resentment against Wall Street while their families are hurting.

Democrats have hammered Republicans in Congress for supporting tax breaks that favor the wealthy while Republicans staunchly oppose tax hikes, even on the richest Americans, arguing they would hurt a fragile economic recovery.

Obama set to revive his call to rewrite the tax code to adopt the so-called "Buffett rule," named after billionaire Warren Buffett who says it is unfair that he pays a lower tax rate than his secretary.

Seeking to use the high-profile speech to draw a stark contrast with his Republican challengers, Obama will roll out new initiatives on easing the nation's home-mortgage crisis and reforming the corporate tax system.

But most of his proposals will face stiff Republican resistance, limiting the chance of any headway in a divided Congress before the Nov. 6 election.

Although Obama is fully aware of the legislative obstacles, his aides see this approach scoring political points by turning up the heat on Republicans he accuses of obstructing economic recovery.


"We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by," Obama will say. "Or we can restore an economy where everyone gets a fair shot, everyone does their fair share."

House of Representatives Speaker John Boehner, the top congressional Republican, suggested before Obama's speech that he was pursuing the "politics of envy" and insisted the election would be a referendum on the president's "failed" policies.

The US unemployment rate was 8.5 percent in December. No president in the modern era has won re-election with the rate that high.

Voters learned on Tuesday that Romney, a former private equity firm chief, and his wife paid an effective tax rate of 13.9 percent in 2010 and expect to pay 15.4 percent for 2011 - tax rates that are far below the top rate of 35 percent on ordinary wages.

"I do think it raises a general point about our tax system here. And one of the things the president is going to talk about in the State of the Union tonight is something Warren Buffett famously talked about -- that he should not pay less in taxes than his secretary does," senior White House adviser David Plouffe said on ABC's "Good Morning America."

To underscore the point, Buffett's secretary, Debbie Bosanek, will be seated in the first lady's box in the House of Representatives for Obama's annual address.

Obama is expected to push tax breaks for bringing manufacturing jobs home from overseas, ideas to help the troubled home-mortgage market and incentives for alternative energy development, people familiar with the speech say.

Obama pushes incentives to encourage lenders to refinance "underwater" mortgages, where the home value has fallen to less than the amount still owed. That would ease a crucial obstacle to a recovery in housing and the broader economy, but his advisers have been at odds over how far to go on this.

He puts forward tax breaks to reward companies for keeping jobs in the United States while eliminating tax benefits for those that outsource jobs overseas.

Obama puts further pressure on China over its currency and trade practices.