During the heated 2008 presidential campaign, Republican John McCain repeatedly charged that Democrat Barack Obama would increase taxes dramatically. One of McCain’s ardent supporters, former Hewlett-Packard CEO Carly Fiorina, went even further. She claimed that Obama wanted to raise “every tax in the book.”
Obama, of course, claimed the contrary. “I can make a firm pledge, under my plan, no family making less than $250,000 a year will see any form of tax increase; ” he said, during one of many campaign speeches, this particular outing in Dover, N.H. “Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”
That was then. With his first budget as president now before Congress, the president has finally revealed his hand on taxes, and reaction to the proposals is sharply divided along partisan lines.
Treasury Secretary Timothy Geithner, speaking for the administration, called the president’s tax proposals balanced. “This set of tax reforms strikes a balance between targeted tax cuts to spur investments in job growth and innovation here at home, middle-class tax relief to make our tax system more fair, measures to crack down on abuses that send jobs overseas, and long-term fiscal discipline,” Geithner said in a statement.
On the other extreme, Sen. Charles Grassley, R-Iowa, the top-ranking Republican on Senate Finance Committee, contends that the president’s proposed tax breaks for individuals, families, and businesses are mostly targeted at individuals who already pay little or no taxes. As such, “The tax increases in the budget dwarf the tax relief,” he said in a statement.
As usual, the truth lies somewhere in between. True to the president’s word, those making less than $250,000 a year won’t see a net increase in their taxes. In fact, depending on how you crunch the numbers, the president’s budget will cut taxes overall — but not for everyone.
One of the biggest issues during the campaign, the fate of the Bush tax cuts of 2001 and 2003, is a case in point. The cuts are set to automatically expire in 2011. Obama is proposing to eliminate the breaks for individuals and households making above $200,000 or $250,000 a year, respectively.
The top two individual income tax brackets would revert to 2001 levels: 36 percent and 39.6 percent (up from 33 percent and 35 percent) in fiscal year 2011. The long-term capital gains tax rate would also rise from 15 percent to 20 percent. Personal exemption phase-outs for high-income households would also be reinstated at 28 percent instead of the highest marginal rate.
These moves would raise close to $1 trillion over 10 years, according to the White House. Out of 143 million returns filed in 2007, about 4.5 million reported more than $200,000 in adjusted gross income, according to the most recent data available from the Treasury Department.
When other proposed tax hikes on oil and gas companies, life-insurance products, executives of investment partnerships and U.S.-based companies that operate overseas are added, the budget would raise taxes by $1.9 trillion over the next decade.
Included in that amount is the president’s plan to charge 50 of the biggest financial firms a fee to recoup taxpayer investments in the banks during the financial crisis. That would raise about $90 billion.
The president, however, is proposing to make permanent the Bush tax breaks for individuals and households making less than the threshold amounts, and that would cost the government $2 trillion over 10 years.
On another contentious issue, the estate tax, the president’s budget is calling for the levy to be fixed at a top rate of 45 percent on estates that exceed $3.5 million per person, or $7 million per household. The estate tax expired this year, and will revert to a $1 million exemption and a 55 percent top rate in 2011 if Congress takes no action. The proposal would increase the deficit by $262 billion over 10 years.
In addition, Obama is proposing to eliminate capital gains taxes on the stock of small businesses (firms with $50 million or less in gross assets) if the stock is held for at least five years. That would cost $8.1 billion over the next decade. Only stock acquired after Feb. 17, 2009 would qualify.
The administration’s call for a permanent extension of a credit for research, a credit for small businesses that hire workers, and an accelerated depreciation for business equipment would cost $71 billion over the next decade.
Employers would receive the tax credit, up to $5,000 against payroll taxes, for every net new employee they hire in 2010. Startups would be eligible for half the credit, according to the National Small Business Association.
In addition, businesses can get a bonus 6.2 percent tax credit on aggregate wages in excess of inflation — reimbursing the employer for the Social Security payroll taxes they accrue on pay raises granted to workers making less than $106,000 a year.
The administration is also supporting efforts in Congress to change the Alternative Minimum Tax (AMT) so it no longer hits middle-income households. The measure will cost $660 billion over the next decade.
His package of other lower- and middle-income tax cuts — a hike in the child-care tax credit, making the American Opportunity Tax Credit more generous, extending the Making Work Pay credit, and expanding the low-income tax credit — would cost the government $170 billion over 10 years. The administration estimates that the “Making Work Pay” tax break, which will be extended for another year, will affect 95 percent of working families.
The conservative National Federation of Independent Business (NFIB) contends that the administration’s budget doesn’t go far enough to provide relief for small businesses. The NFIB advocates a full repeal of the estate tax and the AMT, a six-month payroll tax holiday for small businesses, and an expansion to 100 percent of a deduction on the cost of health insurance paid by the self-employed.
When all is said and done, the Obama plan will eliminate income taxes for 10 million Americans, according to Brookings Institution economists. Republican critics and conservative think tanks like the Heritage Foundation refuse to consider an extension of Bush-era tax cuts for the middle class an “Obama tax break.” Bill Rys, tax counsel for NFIB, says, “If you are already paying a tax rate today and it’s just going to be extended, that’s not a tax break.”
Such tax cuts as the research credit, and bonus depreciation for certain assets are also an extension of current policy and should not count as well, according to Curtis S. Dubay, a senior tax analyst with the Heritage Foundation. By Dubay’s reckoning, the Obama budget will raise taxes by $2 trillion over 10 years, but only contains about $170 billion in true tax cuts over the same time.