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Reviewing the State of the Union Address
By Children’s Home Society of Florida Foundation
In his State of the Union Address last week, President Obama included several tax proposals. He stated his hope that high-income earners pay larger taxes in the future. The President also proposed a substantial number of major tax changes for businesses with international operations.
White House Examples
For example, he restated the “Buffet rule” that asks high income individuals to pay at least as high a rate as that paid by middle-income earners. The President noted, “Right now, because of loopholes and shelters in the Tax Code, a quarter of all millionaires pay lower tax rates than millions of middle-class households.”
The White House also proposed that those with incomes over $1 million pay a minimum tax rate of 30%. Taxpayers with incomes over $1 million will have new limits on deductions for mortgage interest, healthcare expenses, qualified retirement plan contributions and childcare.
The Proposals
Many of the proposals for businesses were outlined in a White House press release on January 25th 2012. These major changes are designed to encourage U.S. companies to maintain their U.S. operations and increase employment here rather than overseas:
1. Overseas Plants – There would not be deductions for moving plants overseas. In addition, there would be a 20% tax credit against the cost of moving jobs from overseas back to the United States.
2. Manufacturing – Those manufacturers who purchase equipment would be able to expense 100% of those purchases. This option also existed in prior years and is expected to encourage building factories in the U.S. rather than abroad.
3. Major Job Losses – Areas that have experienced a closing of a military base or a major factory could qualify for a new investment credit of up to $2 billion. This credit creates incentives for building new plants or factories in depressed areas.
4. Minimum Tax – Corporations could be subject to a new minimum tax on their overseas jobs and profits.
Conclusion
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Filed under: Taxation | Tagged: "Buffet rule", income tax, obama, On the White House Tax Proposals, Reviewing the State of the Union Address |
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FOLLOW-UP: Congress Responds to the White House Tax Proposals
Following the State of the Union Address, members of both parties responded to the proposals by President Obama. Understandably, the Democratic Members tended to support his proposals while the Republican Members chose a different route.
Ways and Means Ranking Member Sander Levin (D-MI) supported the President’s incentives for manufacturing. With an understandable desire to encourage greater manufacturing in his home state of Michigan, Levin stated, “The President articulated an action plan that sets our priorities in the right place – middle-class opportunity, tax fairness and a ‘Make it in America’ manufacturing policy.”
Sen. Jim Webb (D-VA) focused on the proposal to raise taxes on capital gains and dividends. He noted, “But as we begin to move forward and restore economic fairness, we need to fix the tax formula for capital gains and dividends which are passive income. The rate on capital gains is as low as it’s been in a very, very long time.” He continued that it is essential “to raise revenues in order to fix our economic situation” and restated his desire to increase the capital gain and dividend rate above the current 15%. In prior years, the capital gains rate has been 20% or even higher.
Sen. Orrin Hatch (R-UT) is the Ranking Member of the Senate Finance Committee. He expressed concern that the proposals by the President would “hit small business” and reduce the number of new jobs. Hatch stated, “Real effective tax reform is long-past due and is something both political parties agree must happen. We must reform our tax code in a way that generates economic growth and prosperity by generating more taxpayers – not higher taxes.”
House Ways and Means Committee Chair Dave Camp (R-MI) also echoed the importance of reducing unemployment through job creation. He noted, “Instead of focusing on tax reform that can create jobs, the President spent his time talking about how he intends to take more money away from employers, investors and savers in order to create new carve-outs for the few industries and projects favored by his administration. That is nothing more than the usual Washington game that has led to a tax code already littered with lobbyist loopholes.”
Source: Children’s Home Society of Florida Foundation
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Reducing Rates by Reducing Deductions
On March 1, the Senate Budget Committee held a hearing on options for major tax reform. Senate Budget Committee Chair Kent Conrad reviewed the current White House budget proposals. The White House budget proposes $1.5 trillion in tax increases over the next decade. Individual tax rates would be increased to a top rate of 39.6%. The estate exemption is reduced from $5.12 million to $3.5 million. Higher-income taxpayers in the 39.6% bracket would have itemized deduction tax savings limited to 28%. Finally, the White House proposes a corporate rate of 28% with reduced depreciation and other deductions.
Sen. Conrad outlined three major aspects of any comprehensive budget solution. First, there will be a reduction in discretionary spending. Second, Medicare, Medicaid and Social Security must be reformed. Third, there will be comprehensive individual and corporate tax reform.
Conrad called the current tax code “simply indefensible.” In his view, “It is completely out of date.”
He observed that the tax code now only raises funds equal to 15% of the gross domestic product, the lowest percent of the economy paid in Federal taxes in 60 years. In order to balance the budget, Conrad states it will be necessary to have tax revenue that equals “19.5% to 20.6%” of gross domestic product.
Conrad believes that “scaling back tax expenditures should be at the heart of any tax reform.” The total for tax expenditures, including preferences, credits and deductions, was $1.2 trillion in 2011.
Sen. Pat Toomey (R-PA) is one of the senior Republican members of the Budget Committee. He noted that there is a general agreement on “the virtue of broadening the base and lowering the rates as a fundamental dynamic of tax reform.” However, Toomey questioned the White House strategy because the direction for corporate rates is consistent with broadening the base and lowering the rate, but the White House hopes to increase individual tax rates.
Editor’s Note: Many Senators and Representatives favor the concept of base broadening. However, for individual taxes this necessarily will require a reduction in the tax savings in the from of deductions for mortgage interest, state taxes, medical expenses and charitable gifts. For the corporate tax system, there will need to be much more restrictive rules on depreciation and many credits. While the tax bill now being discussed for the November session following the election will probably apply for just one year. There is likely to be an effort for comprehensive tax reform in 2013.
Source: Children’s Home Society of Florida Foundation
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