Voters Deal Blow To Obama's Tax Agenda

by Mike Godfrey, Tax-News.com, Washington

04 November 2010

US President Barack Obama will find it harder to force through his legislative agenda over the next two years after an emphatic Republican victory in the mid-term elections resulted in the Democrats losing control of the House of Representatives, changing the political landscape.

At the time of writing, Republicans had taken 58 seats from Democrats in the House, easing the party comfortably past the 218 seats needed for a majority in the lower chamber. With three states still left to declare, the Democrats have managed to cling on to a majority in the Senate, currently holding 51 seats in the 100 seat chamber. The Republicans gained six seats in the Senate but the party will be disappointed not to have taken control of the upper house, and it is the first time in eight decades that the Senate has not followed suit when the House switched hands.

Before the new Congress begins in January however, the present incumbents must attempt to pass a key tax bill that will extend some or all of the tax cuts enacted under the presidency of George W. Bush and which are due to expire at the end of this year. President Obama had wanted these tax cuts to lapse for single taxpayers earning more than USD200,000 (and married couples earning USD250,000) whilst Republicans were hoping to extend the tax cuts in their entirety, accompanied by offsetting cuts in government spending.

Letting all these tax cuts lapse would mean that in 2011, the bottom 10% tax bracket would revert to 15%, and there would be a 3% increase in the next three income tax tiers (to 28%, 31% and 36% respectively). The top rate of income tax would also rise, by 4.6% to 39.6%, next year. And the top rate of capital gains tax would rise from 15% to 20% in 2011; dividends, currently taxed at a maximum of 15% would be taxed as ordinary income at rates of up to 39.6%, as would interest income, currently taxed at a maximum of 35%.

There is also the matter of the estate tax to deal with; this tax has been repealed for 2010, but will spring back in 2011 at pre-2001 levels - a rate of 55% with an exemption threshold of USD1m for individuals and USD2m for couples. This is unlikely to be dealt with as part of a tax extenders package, but Tuesday's election result will strengthen the Republican's resolve to scale back this tax next year.

Going forward, President Obama may find himself having to fend off threats from the Tea Party wing of the Republican contingent to repeal the health care reforms. This has been the most significant achievement of the Obama administration so far, but for those on the right, this reform encapsulated Obama's tax and spend approach, and was an increase to far in the reach of government.

To help pay for the reforms, this legislation increases the Hospital Insurance (HI) tax rate by 0.9% from 2013 on an individual taxpayer earning over USD200,000 (USD250,000 for married couples filing jointly). The legislation also broadens the HI tax to include net investment income in the taxable base in the case of a taxpayer earning over USD200,000 (USD250,000 for a joint return).

The health care bill also levies a 40% excise tax on insurance companies and plan administrators for any health coverage plan with an annual premium that is above the threshold of USD10,200 for single coverage and USD27,500 for family coverage, effective from 2018.

The President's mission to curb what he considers to be unacceptable levels of corporate tax avoidance by tightening up international tax rules and providing disincentives for US firms to 'ship jobs overseas' may also have to be moderated. Business groups have become increasingly frustrated about these policies, and have spoken out against changes to foreign tax credit rules and increasingly burdensome reporting requirements in particular. These groups will doubtless find a more sympathetic ear in Congress from next year.

"Voters have resoundingly rejected more government spending, higher taxes, and more burdensome regulations that have caused crippling uncertainty for businesses," said US Chamber of Commerce President and CEO Thomas J. Donohue. "We will work with members of both parties who support policies that enable businesses of all sizes to do what they do best — create jobs, opportunity, and prosperity."

According to the White House, President Obama told Republican leaders in Congress that they needed to "find common ground, move the country forward and get things done for the American people."

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