Obama Aims $1.4 Trillion Tax Increase at Highest U.S. Earners ...

February 15, 2012, 10:15 AM EST

By Richard Rubin and Steven Sloan

Feb. 14 (Bloomberg) ? President Barack Obama called for $1.4 trillion in fresh revenue from Americans at the top of the income scale, proposing higher taxes on wages and investments and limiting breaks for retirement savings and health insurance.

The tax proposals in the administration?s fiscal 2013 budget plan, released yesterday, were immediately rejected by business groups and congressional Republicans, who said the ideas are part of Obama?s re-election strategy and gave them little chance of advancing into law in 2012.

?Whether this occurs in Congress this year or this is the tax platform for this year?s election, it?s disconcerting for businesses,? said Caroline Harris, chief tax counsel at the U.S. Chamber of Commerce, the nation?s largest business group.

In what he billed a bid for tax fairness and deficit reduction, Obama reversed his previous policy of taxing dividends more lightly than wage income. The budget plan would raise $206.4 billion over 10 years by treating dividends as ordinary income for married couples making more than $250,000 a year and individuals making more than $200,000.

?We simply can?t afford to devote $206 billion for lower tax rates for the highest-income Americans,? Gene Sperling, White House director of the National Economic Council, told reporters. ?Our system for taxing investment income for the most well off Americans is clearly broken.?

Higher Rates

Obama is proposing a top individual income tax rate of 39.6 percent in 2013, up from 35 percent. His budget would tax long- term capital gains at a top rate of 20 percent, up from 15 percent. The top dividend tax rate is now 15 percent.

An additional 3.8 percent tax on the unearned income of couples earning $250,000 and individuals making at least $200,000 will take effect next year as part of the 2010 health- care law. As a result, under Obama?s plan some taxpayers would pay 43.4 percent in federal taxes on their dividends next year. That?s almost triple what they now pay and comes on top of corporate taxes.

A coalition of companies, including AT&T Inc. and United Parcel Service Inc., has been lobbying to maintain the current rates on capital gains and dividends. Democratic leaders in Congress may take their cues from Obama and propose a higher tax rate on dividends than on capital gains, said Jim McCrery, a lobbyist for the coalition.

?There was some comfort in knowing that the president was supporting a top rate for both of 20 percent, and now that?s been taken away,? said McCrery, a former Republican member of Congress from Louisiana who sat on the House Ways and Means Committee.

Policy Difference

Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington, said the administration?s proposal to tax dividends at higher rates than capital gains is surprising, because such gains tend to go to those with the highest incomes.

?What is the policy difference that the administration has suddenly found between qualified dividends and capital gains?? he said. ?Why do they get different rates now??

The administration also wants to impose a 30 percent minimum tax for individuals with annual incomes of at least $1 million, known as the Buffett rule after billionaire investor Warren Buffett, who originated the idea last year.

That would replace the alternative minimum tax, ?which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended,? the administration said.

Tax Code Rewrite

Sperling said the AMT would be eliminated as part of a broader rewrite of the U.S. tax code. The administration hasn?t made such a proposal, and the budget released yesterday didn?t include repealing the AMT or imposing the Buffett rule.

Obama?s budget doesn?t say how much revenue the Buffett rule would generate and it doesn?t provide details on how the proposal would affect individuals? tax calculations. The U.S. collected $39.1 billion from the alternative minimum tax in 2011, according to projections from the Tax Policy Center, a nonpartisan research organization in Washington.

Obama?s budget plan revives calls to allow the 2001 and 2003 tax cuts on income and capital gains to expire at the end of 2012 for families earning more than $250,000 a year. It also proposes capping itemized deductions and other tax benefits for these families at 28 percent.

The list of capped tax breaks includes municipal bond interest and employer-sponsored health insurance. In its budget, the administration expanded the proposal to include contributions to tax-advantaged retirement accounts such as 401(k) plans.

Private Equity Managers

The president?s plan would tax the profits-based compensation paid to private equity managers at ordinary income rates instead of a preferential 15 percent rate. It also would curtail tax breaks for corporate jets and oil and gas companies.

Obama reintroduced previous years? proposals to limit U.S. companies? ability to defer taxation on income earned overseas. He proposed new breaks for businesses that hire more workers, manufacture advanced vehicles, make capital investments or bring jobs into the U.S.

?This is not an integrated plan for tax reform,? said Hank Gutman, principal in charge of federal tax legislative and regulatory services at KPMG LLP in Washington. ?These are ad hoc proposals to address issues the administration perceives as important.?

Representative Dave Camp, who heads the House Ways and Means Committee, said Obama?s proposals wouldn?t foster the neutral platform that businesses need to compete.

Picking Winners

?The president has decided to play the age-old Washington game of picking winners and losers and handing out favors to industries he thinks will help him politically, making the code less fair and more complex for average Americans,? said Camp, a Michigan Republican who is developing a tax-code overhaul.

Separately from the budget, Obama is proposing a rewrite of the corporate tax system to eliminate tax benefits to lower the top corporate rate from 35 percent. The administration plans to release more details of its corporate tax framework by the end of the month.

The administration also proposed a boost to tax enforcement for the Internal Revenue Service, increasing the agency?s budget by 8 percent to $12.8 billion.

?With assistance from Roger Runningen, Alex Wayne and Jeff Plungis in Washington and Kate Anderson Brower in Annandale, Virginia. Editors: Jodi Schneider, Jim Rubin.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

Source: http://g7finance.com/global-news/obama-aims-1-4-trillion-tax-increase-at-highest-u-s-earners/

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