Rejected Tax Increases for High Earners Return in Obama's Budget Proposal
The president, in a $3.7 trillion budget plan released yesterday in Washington, revived dozens of proposals that Congress has rejected, including $129 billion in higher taxes on the overseas profits of U.S. companies. He also proposed changing the tax treatment of oil, gas and coal companies, which would raise about $46 billion.
The proposals revived opposition from businesses. They had been looking for a signal of a friendlier tax stance.
“There was the hope they would consider some of the arguments and concerns that were raised by the multinationals” after Obama included similar proposals in his first two budgets, said Lindy Paull, a partner at PricewaterhouseCoopers LLP in Washington.
Obama and Treasury Secretary Timothy Geithner in the past few months have held a series of meetings with corporate executives, who have pushed for reducing taxes on global profits rather than increasing them.
“There is disappointment that those proposals were not revised and that they’re continued to be labeled loophole closers when they are pretty fundamental changes to the tax code,” Paull said. “People have spent a lot of time and effort trying to discuss that with the administration.”
Michigan Representative Dave Camp, a Republican who would play a pivotal role in any rewrite of the tax code as chairman of the House Ways and Means Committee, blasted Obama’s proposals.
“Rather than setting the stage for broad-based, pro-growth tax reform, this budget goes in the opposite direction with more tax hikes,” Camp said.
The proposal also would bring back pre-2001 tax rates on income and capital gains for individuals earning more than $200,000 annually and married couples making more than $250,000. The estate tax would return to 2009 levels with a $3.5 million per-person exemption and a 45 percent top rate. Under a law Obama signed in December, lower rates expire at the end of 2012.
“The president was unable to reverse the Bush tax cuts this past year with a majority in each house of Congress, so it’s very difficult to see how he will be successful over the next two years with the Republicans firmly in control of the House,” said Neal Weber, managing director in charge of RSM McGladrey’s Washington national tax office.
Limits on Deductions
The budget plan would limit itemized deductions for top earners to 28 percent, curbing the value of tax breaks for charitable contributions, home mortgage interest and state and local taxes. That proposal has been included in every budget of Obama’s presidency and was rejected as a revenue-raising provision to fund his overhaul of the health system last year.
Under the budget’s assumptions, federal revenue as a percent of the economy would increase from 14.9 percent in 2010 to 20 percent in 2021. Part of that increase stems from projected economic growth, not from policy changes.
A key Senate Republican also criticized the tax increases in the budget.
“This budget fails to preserve the pro-growth policies needed to expand our economy, create jobs and reduce the deficit,” said Senator Orrin Hatch of Utah, the top Republican on the Finance Committee.
Administration officials said the budget is balanced with proposals favorable to business, such as making permanent a tax credit for conducting research.
Obama proposed an array of other tax incentives. They include the elimination of capital gains on some small business stock and one to revive the Build America Bonds program, which expired at the end of 2010.
The budget also proposes converting a deduction for energy- efficient buildings into a credit. Obama wants to extend a provision expiring at the end of 2011 that allows certain energy tax credits to be converted into grants.
Instead, many in the business community are focusing on renewed proposals to place limits on multinational companies’ ability to defer income taxes on profits they earn outside the U.S. These plans have drawn criticism from corporations such as Microsoft Corp. and Cisco Systems Inc.
The budget also revives a proposal that Congress require executives of investment partnerships including private-equity firms to pay ordinary tax rates on the profits they receive as compensation. This pay, known as carried interest, currently can qualify for lower capital gains tax rates. The proposal would raise $14.8 billion over 10 years.
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