Economy & Budget

Top ten tax hikes in the new Obama budget

Top ten tax hikes in the new Obama budget

The latest Obama budget is another high-tax, high spending insult to the American taxpayer. If the Obama budget became law, taxes would be $1 trillion higher over the next decade than under current law.

Everyone who pays income taxes—including the middle class—would face a tax increase thanks to a Beltway accounting trick known as “Chained CPI.” Smokers will pay twice as much in federal taxes as they do now. There are new taxes on IRAs and 401(k) plans. The budget places new limits on your ability to deduct mortgage interest, charitable contributions, and state income and property taxes. The death tax rate spikes up to 45 percent. There’s a new “Buffett Rule” which will force “the rich” (which eventually means all of us) to pay at least 30 percent of income in federal taxes. There are a host of new taxes on energy companies (meaning higher electric bills and more pain at the pump), financial service companies (meaning more expensive investment fees, life insurance commissions, etc.), and on pension plans.

Many of these tax increases fall directly on families making less than $250,000 per year—yet another violation of President Obama’s promise not to raise “any form” of taxes on these families at all.

Taxes will permanently rise to 20 percent of economic output. That’s not only higher than the post-War economic average of 18.2 percent—there’s only been one year since World War II when taxes have even once gotten to that level. That was the year 2000, when the economy was booming and a wealthy America was sending in fat tax payments to Washington. This budget’s super-high tax level is just a down payment on a European welfare state.

The budget never, ever balances. Debt held by the public will grow from $12.4 trillion today to $19 trillion at the end of this 10-year budget. The government in 2023 will still be spending $439 billion more than it collects in taxes, despite a trillion-dollar tax hike. Deficits and debt will only grow from there as entitlement costs explode.

Where is Senator Harry Reid (D-Nev.) in all this? He, and he alone, has the power to call up this trillion dollar tax hike budget for a vote in the U.S. Senate. Maybe he’s too afraid to do so, since the last time the Senate voted on an Obama budget it was defeated by a staggering 99-0. Senators should be forced to answer to taxpayers: are you on our side, or on Washington’s?

Below are the top ten tax increases in President Obama’s budget (all numbers are over a decade) from Americans for Tax Reform:

1. Chained CPI.  The budget would change the definition of inflation for all federal budget purposes, including federal tax provisions.  Because tax brackets and other tax items are indexed to inflation, slowing down their growth is an income tax increase.  This is a tax increase for all Americans who pay income tax, including middle class Americans.  In the past, Congress’ Joint Committee on Taxation has estimated that enacted “chained CPI” would be a $100 billion tax increase

2. Itemized deduction cap.  The Obama budget limits the maximum value of itemized deductions, like those for charitable donations and mortgage interest. This is an income tax increase.  No matter what tax bracket you are in, under this Obama provision you can’t benefit any more than if you were in the 28 percent bracket.  There are three tax brackets higher than this: 33 percent, 35 percent, and 39.6 percent.  These families will not be able to fully deduct things like mortgage interest, charitable deductions, and state taxes paid.  Note that this is on top of the phaseout of itemized deductions (“Pease”) that President Obama forced on taxpayers in the fiscal cliff.  Tax increase: $529 billion

3. Death tax hike.  The Obama budget would raise the death tax rate from 40 percent today to 45 percent.  It would also reduce the inflation-indexed death tax “standard deduction” from $10.3 million today for married couples (half that for singles) to $3.5 million with no inflation adjustment.  There are also other death tax increases of a more technical nature.  Tax increase: $79 billion

4. “Buffett rule.”  The President’s budget would impose a new “Buffett rule” on taxpayers whose adjusted gross income exceeds $1 million.  These taxpayers would have to face an average tax rate (that is, their tax bill divided by their income less charitable contributions) of 30 percent.  Tax increase: $53 billion

5. Tobacco tax hike.  The President’s budget nearly doubles the tobacco tax, from $1.01 to $1.95 per pack, and then indexes it to inflation from there.  This is a clear tax hike on middle class Americans.  According to independent estimates, the average smoker in America makes about $40,000 per year.  Additionally, tobacco taxes are a declining tax revenue base, and as a result it’s inappropriate to fund new government programs using it. This isn’t the first time President Obama has raised federal tobacco taxes. In 2009, on his sixteenth day in office, he signed into law a 156 percent increase in the tobacco tax.  Such tax increases are a violation of Obama’s central campaign promise not to sign “any form of tax increase” on Americans making less than $250,000 per year. Tax increase: $78 billion

6. IRA and 401(k) plan restrictions.  There are two new tax increases on IRA and 401(k) savers in the President’s budget.  The first restricts the total account balance in ALL tax preferred IRAs and 401(k)s to a combined $3 million.  The second would require that non-spouse beneficiaries of IRAs and 401(k)s distribute all money within five years, rather than over their lifetime.  Additionally, the budget forces all employers with 10 or more employees to open payroll-deduction IRAs at work.  Tax increase: $14 billion

7. “Carried interest” capital gains tax hike.  Under current law, capital gains are taxed at rates lower than ordinary income to reflect the double taxation of investment capital, risk, and other factors.  The current top capital gains tax rate is about 24 percent.  Some capital gains are received by managing partners of investment partnerships.  These capital gains are known as “carried interest.”  Despite the fact that these capital gains are no different than capital gains anywhere else (and are the same source of capital gains that the limited partners in such arrangements receive), the President’s budget taxes these capital gains at ordinary income tax rates, which are nearly 45 percent on an all-in basis.  Tax increase: $16 billion

8. Energy tax hikes.  There are energy tax hikes littered throughout the budget.  Taken together, these tax increases will have one effect and one effect only: higher prices for consumers at the gas pump and in their utility bills.  Tax increase: $94 billion

9. Tax increases on international income.  The U.S. is one of the only developed nations that taxes the income of U.S. companies and individuals which are earned overseas (so-called “worldwide taxation”).  In so doing, we potentially expose this money to taxation in two different countries on the same earnings.  The Obama budget increases the likelihood that this double taxation will occur by removing protections against it.  Ideally, the U.S. would only seek to tax income earned within the United States, a system known as “territoriality.”  Tax increase: $158 billion

10. Financial system tax increases.  These, too, are littered throughout the budget.  They would impose taxes on banks, brokerage firms, life insurance companies, and virtually every other way that the middle class saves and invests.  These costs will be passed along in the form of higher fees, bigger commissions, and lower returns to shareholders.  Tax increase: $94 billion

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