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Obama's Budget Increases Taxes Against Republican Opposition

by Mike Godfrey, Tax-News.com, Washington

12 April 2013


United States President Barack Obama has finally issued his 2014 Budget, which, while cutting some Social Security and Medicare benefits, also includes new spending with tax increases on the wealthiest individuals – both of which are proposed in the face of Republican opposition.

From a complex and detailed presentation, it appears that the President's Budget is intended to cut the US fiscal deficit by some USD1.8 trillion over the next ten years, and more than replace the current USD1.2 trillion "sequester." However, the inclusion of up to USD680bn of tax increases to achieve that level of deficit reduction, rather than an elimination of the deficit at the end of the ten years, will remain completely unacceptable to the Republican Party.

Against some opposition from within the Democratic Party, cuts in spending on Social Security would be achieved by changing the way cost-of-living adjustments are calculated. It is expected that USD130bn over ten years would be saved by adopting a "chained CPI" measure of inflation that would slow the growth in federal benefits that are annually adjusted for cost of living. The elderly, veterans and disabled with the lowest incomes would be shielded from the changes.

The adoption of chained CPI would also raise USD100bn more revenue from the individual income tax code, through a lower adjustment over time to tax thresholds and brackets, the standard deduction and contribution limits to individual retirement accounts (IRAs), which are adjusted for inflation annually. It has been estimated that the adoption would mean, by 2020, an average tax increase of USD311 among the nearly 81% of taxpaying households.

In fact, among his new tax measures, Obama would also set an upper limit on the tax-advantaged portion of an individual's savings across IRAs and other tax-preferred retirement accounts. That fund limit, which would be an estimated USD3m this year, would be based on what could finance an annual annuity of USD205,000 in retirement.

The Budget also contains a new tax credit for small businesses that, aimed at companies paying less than USD20m in wages in 2012 and with a limit of USD5m, would give a one-time 10% credit for the amount paid to new workers and in wage raises to current workers.

However, most Republican opposition will be generated by Obama's proposed measures to close "tax loopholes" for the wealthiest. As he has proposed before, the President would limit the value of itemized deductions for high-income households and introduce a "Buffett Rule."

To raise up to USD530bn over ten years, the Budget would limit the value of deductions at a cap of 28%, below the two top income tax rates, while the Buffett Rule (which, by itself, would raise only USD53bn in ten years) would impose a 30% minimum effective federal tax rate on those with adjusted gross incomes above USD1m, although the rate would be phased in for those making between USD1m and USD2m.

In addition, managers of private equity, venture capital and hedge funds would begin to pay their marginal income tax rates on the portion of their income known as "carried interest."

The President, while presenting his Budget, said that he did not intend it to be "a starting point in the negotiations," as he had "already met Republicans more than half way," but Republican Senate Minority Leader Mitch McConnell (R – Kentucky) called the Budget a "left-wing wish list" and the House of Representatives Speaker John Boehner (R – Ohio) believed that "it is time for Washington to deal with its spending problem."

Boehner added that the President "does deserve some credit for some incremental entitlement reforms that he has outlined in his Budget. But I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes."

House Budget Committee Chairman Paul Ryan (R – Wisconsin) called the Budget a "missed opportunity." He argued that the White House "says they never balance the Budget … (whereas) our plan balances the budget in ten years to foster a healthier economy and to help create jobs. (The President’s Budget) goes over old ground. It takes more from families to spend more in Washington."

Republicans are adamant that the President already obtained sufficient tax increases within the bipartisan agreement to avoid the "fiscal cliff" at the beginning of 2013. Ryan's budget proposal, already passed in the Republican-led House, sets out USD4.6 trillion in deficit reduction, mainly through cuts in healthcare spending and without additional tax hikes. Republicans believe that any elimination of tax deductions and credits should form part of a revenue-neutral tax reform plan, which would also have the objective of reducing individual and corporate income tax rates.

TAGS: individuals | tax | investment | small business | business | retirement | hedge funds | budget | tax thresholds | tax credits | health care | tax rates | United States | tax breaks | tax reform | individual income tax

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