Obama Produces Election Budget

by Mike Godfrey, Tax-News.com, Washington

15 February 2012

United States President Barack Obama has announced his proposed budget for the next fiscal year beginning on October 1, which, with over USD1.5bn in net new revenue from taxes on the wealthy and more spending on job creation and education, will provide his platform for re-election.

Overall, President Obama’s 2013 Budget proposes USD3.8 trillion in spending, or 24.3% of gross domestic product (GDP), and USD2.5 trillion in revenues, or 15.8% of GDP, resulting in a still substantial deficit of USD1.3 trillion (8.5% of GDP). However, it is foreseen that the deficit would fall to 3.0% of GDP by 2017, which should be sufficient to stabilize US public debt at 76% of GDP by the end of this decade.

According to Treasury Secretary Timothy Geithner, the President’s proposals “strike the balance between supporting growth and laying out a responsible, long-term deficit reduction plan that simplifies the tax code and asks the most fortunate to pay their fair share”.

To boost short-term growth and job creation, the present 2% payroll tax cut (currently being discussed in Congress) and the 100% bonus depreciation provision would be extended until the end of 2012, and a new 10% tax credit for new jobs and payroll increases would be focused on small business through 2012.

Tax credits would also be provided to support domestic clean energy manufacturing, while there would be tax relief of up to USD10,000 per student over four years and USD137bn in additional higher education tax relief over the next 10 years.

In addition, there would be permanent increases to the Earned Income Tax Credit to support working families with children, and to the tax credit for child and dependant care, while there would be a provision for automatic enrolment in retirement accounts in companies employing at least ten workers.

With the aim of improving manufacturing investments and job creation in the US, a 20% tax credit would be given against the expenses incurred in 'insourcing' a business activity to the country, and prohibiting tax deductions for "shipping jobs overseas". To focus domestic production, there would be a larger tax deduction for advanced manufacturing activities, while the deduction for oil and other fossil fuel production would be disallowed.

The research and development credit would be made permanent, and enhanced by increasing the credit rate for the alternative simplified credit from 14% to 17%.

With regard to the existing tax cuts for small businesses, the capital gains tax elimination on certain small business investments would be made permanent; the amount of currently deductible start-up expenditures would be doubled; and the Small Business Health Care Tax Credit would be simplified and expanded.

However, in a move calculated to raise the immediate opposition of his Republican opponents, the President would pay for the above by allowing the 2001 and 2003 Bush tax cuts to expire (including taxing dividends as ordinary income) for households making more than USD250,000 per year; restore the estate tax to 2009 levels; and limit tax expenditures for those earning more than USD1m annually, by capping their itemized deductions and certain other deductions and income exclusions at 28% (the so-called Buffett tax).

Carried interest earned by hedge fund managers and other similar investment service providers would be taxed as ordinary income, while the special depreciation provision for corporate jets would be axed.

During a speech in Virginia introducing his budget, President Obama drew attention in particular to the proposals for tax increases on wealthiest taxpayers: “a quarter of all millionaires pay lower tax rates than millions of middle-class households. You’ve heard me say it - Warren Buffett pays a lower tax rate than his secretary. That’s not fair.” To those who have said that he is engaging in “class warfare”, he replied that all his policies are merely “common sense”.

To be expected, comments from the Republican Party were immediately disparaging. The Chairman of the House of Representatives Committee on the Budget, Paul Ryan (R – Wisconsin), said that the President’s budget called for “record levels of spending increases, tax hikes, and debt. (It) breaks his promise to cut the deficit in half by the end of his first term, and it breaks his obligation to all Americans to confront the nation’s spending-driven debt crisis.”

The House Speaker John Boehner (R - Ohio) added that “the President has proposed a USD1.5 trillion tax increase beginning next year. The plan makes no effort to pull back on the policies, such as the president’s health care law, that are making it harder for small businesses to grow their companies and hire more workers. The President continues to rely on a failed ‘stimulus’ approach, and he ignores the threat that massive deficits pose to long-term economic growth.”

Orrin Hatch (R - Utah), Ranking Member of the Senate Finance Committee, also concluded that “the President’s budget blueprint is better suited to an episode of the Twilight Zone – an alternate reality of more stimulus spending, more taxes, and more debt designed to satisfy his left-wing base during an election year.”

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