In the United States, where we have double jeopardy laws, work is the only crime that you can be punished twice, maybe even three times, with the death tax.
President Obama released his budget proposal yesterday, and as expected, it included a number of new provisions that would dramatically change the tax laws once more, with impacts on taxpayers up and down the income scale. Once you remove the “voodoo economics” there are few budget cuts but many tax increases.
The budget blueprint riled interest groups, though. A particular target of criticism was the president’s renewed proposal to limit the value of individual income tax breaks to 28%, which would boost income taxes paid by those in the 33% and higher tax brackets—essentially raising taxes next year for couples with taxable income above about $223,000 currently.
The president and his co-conspirators believe that your money is not your own. That government has the greater moral authority and imperative to cap and collect the wealth you produce. As Dr. Ben Carlson observes, not even God asks for so much.
Ignoring the Laugher curve, they do not understand (or maybe they do) that as you tax more, you collect less in revenue.
Let’s take a look at some of the budget’s most important tax proposals.
Limited tax savings for itemized deductions and municipal-bond interest
The biggest revenue-raising part of the Obama budget would limit the value of itemized deductions, including the mortgage interest deduction, to 28%. That would impact high-income taxpayers (mostly small businesses) above the $200,000 and $250,000 income thresholds for single and joint filers, respectively, costing them as much as 11.6 percentage points in tax savings. Because of the high-end focus, the impact on industries like the homebuilding sector that benefit from customers taking advantage of those deductions would devastate an already sluggish part of the economic engine.
Implementing the Buffett Rule
The budget also wants to ensure that those with taxable income above the $1 million mark pay an effective tax rate of 30%. The mechanics of implementing what’s become known as the Buffett Rule would include a phase-in of the tax for incomes between $1 million and $2 million, representing a further increase for those highest-income taxpayers with extensive deductions other than charitable contributions. Because you don’t deserve it, the government does.
Lower inflation adjustments for tax-related provisions
The same proposal to link Social Security benefits to the chained Consumer Price Index would also have an impact on taxes. The budget would use the chained CPI to adjust tax brackets, personal exemptions, and standard deductions, leading to slower increases in those figures going forward. Unlike the limits on itemized deductions, the inflation adjustment provisions would affect all taxpayers.
Maximum amounts in IRAs and other retirement accounts
Details on what Obama intends to do with your IRA. The government has determined that you don’t need more than $205,000 a year to retire on. So what Obama’s plan is to tax everybody’s IRA above whatever the amount is that would throw off $205,000 in annual income. The budget would limit IRA, 401(k), and other tax-favored retirement balances to about $3 million. Anybody with more than that, the government wants to lay claim to it because we’ve got a revenue problem. Combined with increases on carried-interest tax rates, this provision would capture hedge-fund managers and other investors who’ve used retirement accounts as successful high-growth investing vehicles. So if you’ve got $3 million in an IRA, anything above that Obama thinks he can take (Hello, Cyprus!), and there’s no push-back that I’ve seen anywhere.
A $3 million cap could negatively affect many people with much smaller balances. That’s because of a potential ripple effect on small-business owners.
Those entrepreneurs are eligible for SEP-IRAs and Simple IRAs, which have 2013 contribution ceilings of $51,000 and $14,500, respectively. Those are much higher than the $5,500 cap for traditional IRAs — $6,500 for people 50 and older — and make it easier to amass balances of $1 million or more.
“The complexity and uncertainty about penalties for themselves could make company owners terminate their plans, which would hit their employees,” said Jack VanDerhei, EBRI research director.
The difficulty of tracking balances of former employees as well as current ones could also prompt many companies, large and small, to close their plans, he adds.
“I think a lot of what people are missing about this is this is most likely going to be very, very difficult from an administrative complexity standpoint for employers to deal with this,” says Jack VanDerhei, research director at EPRI.
A new cigarette tax
The Obama budget would hike federal taxes on cigarettes by $0.94 per pack. Cigarette manufacturers would inevitably get hurt by such an increase, as it would add yet another impediment to cigarette demand that has already been falling sharply for decades.
This is another red herring as cigarette demand declines the tax revenue also declines. Guess what? They have to make up for it sooner or later, probably sooner.
Lower estate tax exemptions
The government gets a third bite at the apple. You are taxed when you earn it. Taxed when you spend it. Then you are taxed when you die, so you can’t leave anything substantial to the people that you provide for. This is just immoral.
The budget would reduce the current $5.25 million estate tax exemption to $3.5 million and push the top tax rate from 40% to 45%. That’s still an improvement from what the estate tax would have looked like without the fiscal cliff compromise, with roughly $1 million exemptions and 55% top tax rates. But the failure to index the $3.5 million figure to inflation will create a need to revisit the issue repeatedly, which is a far cry from the certainty that inflation-indexing gave estate planners earlier this year.
Reduced tax preferences for energy production
Under current law, energy producers are eligible for several tax benefits, including expensing for intangible drilling costs, percentage-based depletion for wells, and the domestic manufacturing tax deduction. The budget would remove these provisions. Earth worshiper desire less oil production in America, but are not disturbed by less free nation’s production. More American oil production could solve many of the nation’s economic problems, however, it goes against the president and other law makers’ desire that America decline in influence and wealth. North Dakota proves this theory, that increased oil production would turn around the economy.
Lower corporate taxes
The budget calls for broad reform of the corporate tax in an effort to cut its rate from 35% to 28% for most companies. Exactly how that reform would take place isn’t entirely clear, but the general idea is to expand the base of money subject to tax to offset any rate reduction and keep the overall impact revenue-neutral. Never mind that America has the highest corporate tax rate in the world. Straight forward corporate tax reform would also cause an economic recovery, but that is not the interest.
Some limited tax breaks
The Obama budget also uses the tax laws to reward certain behavior. They include:
- Making current educational tax credits permanent. Student debt is at a record high, as a nation we only owe more in mortgage loans that we do in student debt. This is also devastating the economy.
- A 10% tax credit for small businesses to hire new employees or boost what they pay existing employees. The employees can then be taxed more to offset the credit.
- Tax credits to encourage employers to create retirement plans and automatically enroll their workers in those plans. That the government will limit and then flip to government control.
- Special tax treatment for business investment and hiring targeted in certain high-poverty areas.
- Tax incentives for education bonds used for building public schools. That always sounds nice.
