The Obama tax hikes begin, gingerly

  • Share
  • Read Later

The very first tax hike (or proposed tax hike) of the Obama era can be found on page 29 of Jumpstarting the Economy and Investing for the Future (pdf!) the main document of the fiscal 2010 budget “outline” released by the White House Office of Management and Budget this morning. Here it is, verbatim:

The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent—and the initial reserve fund would be funded in part through this provision. This provision would raise $318 billion over 10 years.

What this seems to mean is that if you’re in the 33% (which kicks in this year at $171,550 for singles and $208,850 for marrieds filed jointly) or 35% ($372,950 for both) tax brackets, your itemized deductions will be treated as if your tax rate is 28%. So they’ll be worth slightly less.

The upsides here are that we now have an Administration that’s actually willing to come up with ways to pay for stuff, instead of just pretending that the tax cut fairy will take care of everything, and that they’ve picked a way to hike taxes that doesn’t bring any disincentives to work and invest or incentives to shelter income.

The downsides are that the change adds to the complexity of the tax code (albeit only for people who can afford an accountant) and slightly reduces the incentives to charitable giving. The Republicans have also been pressing the idea that this will cause small businesses that are included in personal income tax returns to do less spending and hiring, but that sounds like nonsense. Small business expenses (a new computer; employee salaries) are accounted for on Schedule C; they’re an entirely separate thing from the itemized deductions (charitable contributions and the like) on Schedule A. Plus, the vast majority of people who include their small business earnings in their personal taxes aren’t in the 33% or 35% tax brackets.

So on balance, it seems like an okay way to raise some money. But $318 billion over 10 years is not going to make much of a dent in a deficit projected to total $6.97 trillion over that same period. Seriously reducing deficits down the road is going to take a lot more than that.

The budget outline does predict $150 billion in revenue over the decade starting in 2012 from cap-and-trade auctions to reduce greenhouse emissions, but that money is supposed to go to energy investments, not reducing the deficit.

All other tax increases will for the moment remain hypothetical–mainly because they’re not going to happen in the 2010 fiscal year (which begins in October of this year). There is some vague discussion of them in the budget, though, in a section on paying for health care improvements:

This past year, for instance, the President proposed to use rescission of the high-income tax provisions. Others have proposed different ideas to finance expanded health coverage such as capping the tax exclusion for employer-sponsored health insurance, a value-added tax, or additional offsets in existing health care programs.

“Rescission of the high-income tax provisions” is letting the Bush tax cuts expire for those in the top brackets. The Obama people usually talk about letting the cuts expire for those who make “more than $250,000.” I’ve always figured that what this will mean in practice is simply letting the 33% bracket go back to 36% and the 35% to 39.6%. And I guess letting capital gains and dividend tax rates revert to pre-Bush levels for those in the top two tax brackets. Given the current brackets, these changes would hit some people below the $250,000 income level, albeit not very hard. But the Administration is deliberately keeping all this up in the air for now.

The other suggestions are interesting. Capping the tax exclusion for employer-sponsored health insurance was John McCain’s big health-care proposal during the campaign (although he never presented it quite that way). He got hammered for it by the Dems, but it seems like a good idea. As for the value-added tax, my former Fortune colleague Shawn Tully is convinced that it’s coming. And this budget outline may go down in history as the first official warning of it by the Obama Administration.

0 comments
Sort: Newest | Oldest