In last night’s State of the Union (SOTU) address, President Obama proposed several significant tax increases that would cost American taxpayers an extra $320 billion over the next 10 years. Some new tax breaks amounting to about $235 billon were also suggested. Here are the emerging but still somewhat sketchy details on the most important proposals.
Higher maximum rate on long-term capital gains and dividends
Under our current rules, the maximum individual federal income tax rate on long-term capital gains and qualified dividends is 23.8% (20% from the “regular” federal income tax plus 3.8% from the Medicare surtax on net investment income). Obama’s SOTU proposal would raise the maximum rate to 28%, which would apparently include the 3.8% Medicare surtax. Before Obama’s presidency, the maximum federal rate on long-term gains and dividends was only 15%. Going to 28% would represent an 87% hike during the Obama years.
Prognosis: As they say in New Jersey, fuggetaboutit. This proposal has no chance in the Republican-controlled Congress.
Tax increase on folks who inherit capital assets
When you inherit capital assets (stocks, mutual fund shares, real estate, coins, stamps, other collectibles, and so forth), our current federal income tax scheme gives you a “stepped-up” basis. Specifically, your basis is stepped up to fair market value on the date of your benefactor’s death (or six months later if the executor of the estate chooses that option). This taxpayer-friendly rule allows heirs to sell inherited assets shortly after they are received and owe little or nothing to the Feds (because you only owe tax on the difference between the sale price and your stepped-up basis). Alternatively, heirs can hold onto inherited assets and pay capital gains tax based only on appreciation that actually occurs during their ownership.
As you can see, the basis step-up rule is a valuable break that is available to anyone who inherits an appreciated capital asset, like a parent’s home or Uncle Fred’s collection of rare baseball cards. But some(including the White House) have characterized the basis step-up rule as a “trust-fund loophole,” which implies that it only benefits the rich. I would bet that the vast majority who have saved taxes under the basis step-up rule are not rich, however you choose to define that.
Obama’s State of the Union in two minutes
(2:00)
If you didn’t catch the whole speech, here’s President Obama’s 2015 State of the Union condensed into two minutes.
Obama wants to repeal the basis step-up rule, which would force heirs to pay federal capital gains tax on the difference between an asset’s sale price and the original owner’s basis, which could be nothing, a little or a lot, depending on how long the asset has been owned.
To avoid penalizing the “non-rich,” the proposal would include exemptions for: assets inherited from your spouse, inherited small family businesses, up to $200,000 of inherited asset capital gains per married couple ($100,000 if you are single), up to $500,000 for a home inherited by a married couple ($250,000 if you are unmarried), and certain inherited personal property such as furniture and heirlooms (but not expensive art or collectibles).
As for those who really are rich, the removal of the basis step-up rule would expose inherited capital assets to both the 40% federal estate tax and the federal capital gains tax, which would be increased to 28% (it’s now 23.8%)if Obama gets his way. Now, you presumably would get a basis increase for the federal estate tax hit on an inherited capital asset. Even so, the effective capital gains tax rate on a greatly appreciated inherited asset could approach 16.8% (28% x 60% = 16.8%). The combined federal estate and capital gains tax hit could approach 56.8% (40% estate tax plus 16.8% capital gains tax). Ouch!
Finally, remember that many “rich folks” have paid millions in federal income taxes along the way before they die. My opinion: losing up to another 57% of your wealth to the Feds just for the privilege of dying is unfair no matter how rich you are.
Prognosis: No chance in the Republican-controlled Congress.
Tax increase on middle-class college savers
Under our current federal income tax rules, Section 529 college savings plans work kind of like Roth IRAs. You contribute money to the account (typically set up for a child or grandchild) without getting any tax deduction. The 529 account is allowed to build up federal-income-tax-free. Then you can withdraw money tax-free to pay for the account beneficiary’s qualified college expense. Good deal!
Although they are eligible to use them, the rich don’t need 529 accounts (because they are rich and because they have better ways to finance college expenses). But middle-class college savers need all the help they can get, and the current tax rules for 529 accounts do provide some help.
Each 529 account withdrawal to pay for qualified college expenses consists partly of contributed amounts and partly of accumulated account earnings. Obama’s SOTU proposal would remove the federal income tax exemption for the earnings part (the contributions part would still be tax-free).
Now, if you need proof that 529 accounts are not just an undeserved tax-saving tool for the rich, know this: according to the Investment Company Institute, there were just under 12 million 529 accounts open in 2014 with about $245 billion in assets. That translates into an average account balance of about $21,000. Billionaires are not lining up to take advantage of these accounts.
Prognosis: It is hard to see how hitting middle-class college savers with a brand-new tax matches up with the overarching SOTU theme of “helping working families.” In any case, this proposal has no chance in the Republican-controlled Congress.
New tax on big financial institutions
Obama proposes a new 0.07% tax on the liabilities (not assets) of the 100 or so U.S. financial institutions with assets over $50 billion. The new tax would be expected to raise $110 billion over 10 years.
Prognosis: Apparently, the theory seems to be that voters won’t realize that this tax would be passed on to them. That said, large financial institutions are not necessarily beloved — even by Republicans. So this proposal could actually gain bipartisan support if it was combined with something Republicans really want — such as the Keystone Pipeline, meaningful corporate tax reform, or a 40-hour work week under the Obamacare employer health insurance mandate rules. Don’t count it!
Retirement plan changes
Obama proposes a new $3.4 million cap on the total amount that an individual could accumulate in IRA and 401(k) type accounts.
Prognosis: No chance.
Employers with more than 10 workers that do not offer a 401(k) type plan would be required to set up payroll deduction IRAs for their employees.
Prognosis: Once again, this idea could gain bipartisan support if it could be combined with something Republicans like. Not likely.
New and expanded tax credits for working couples
Obama proposes a new $500 tax credit for married couples when both spouses work: a so-called second-earner credit. The credit would help offset extra costs for childcare and commuting that often discourage having both spouses work.
Obama also proposes to increase the credit for childcare expenses so parents can work to $3,000 per qualifying child. Under the current childcare credit rules, the maximum credit is $1,050 for one child or $2,100 for two or more. However, the credit is reduced if you have more than a very modest income. As a result, the credit for most folks is currently limited to $600 for one child or $1,200 for two or more.
Prognosis: Combine these things with something Republicans like or “turn the page.”
The bottom line
Realistically, I don’t think any of these proposals can be enacted before the 2016 presidential election. Some might have bipartisan support under the right circumstances. However, based on past performance, those circumstances are extremely unlikely to occur during Obama’s remaining two years in office.
Opinion: Obama’s joke of a tax plan only fuels class warfare
By Diana Furchtgott-Roth
Published: Jan 21, 2015 11:58 a.m. ET
Americans are interested in tax cuts, not hikes
If President Barack Obama really wished to help lower-income Americans, he would push through reforms in education, labor relations and the environment.
You have to hand it to President Obama.
Despite Democrats’ loss of the House of Representatives in 2010 and the U.S. Senate in 2014, as well as the loss of 16 statehouses and 10 governorships since Obama’s election in 2008, he keeps advocating for tax increases.
The latest proposal was in Tuesday’s State of the Union Address, where the president proposed raising the top tax rate on capital gains and dividends to 28% from the current 24%. When the president took office in 2009, that rate was 15%.
Obama’s capital-gains proposals are likely motivated by a desire to continue to beat the class-warfare drum. Consider that those tax increases are not part of a serious legislative agenda. Obama has not coordinated this proposal with congressional Democrats, much less congressional Republicans, as part of some tax-reform package.
Lowering taxes is more popular with the American people than raising them, and few politicians who advocate tax hikes are elected to office. Yet Obama plows ahead anyway. Give him an A for persistence, even though he gets an F in helping his party and boosting the economy.
Note also that one sensible part of Obama’s tax proposal, doing away with “stepped-up basis,” a provision that allows an asset’s capital gain to be reset to zero when it’s passed on to heirs at an owner’s death, is couched in class-warfare terms. Obama calls this “the trust fund loophole,” but this is political posturing. Most people who gain from step-up in basis do not have trust funds, and trust funds benefit from many tax provisions other than the step-up in basis. Plus, eliminating step-up in basis can be done without raising tax rates.
There are real reasons why capital is taxed at a lower rate than labor.
If Obama were serious about helping the plight of low-income Americans, he would use the power of his office for real effect rather than political posturing.
Dividends have a lower tax rate because corporate earnings have already been taxed. Taxing dividends, distributions from corporate earnings, is the second time such income has been taxed. Some people might say it is the third time, because the income to purchase equity in a company has already been taxed once under the individual income tax, but that is a subject for another day.
The statutory federal corporate tax rate is 35%, although effective tax rates vary by firm, depending on the amount of plant and equipment purchased, among other factors. If a company pays dividends out of net income, then a 35% corporate tax rate plus a 28% individual tax rate on dividends adds up to a total federal tax rate on dividends of 53%. State and local taxes can bring the tax higher.
Capital gains are taxed at a lower rate because, depending on when the original asset was purchased, they might have a substantial inflationary component. Many people hold on to capital for years before selling it and Congress decided that they should not be taxed on the artificial gains from inflation. Rather than calculating the inflationary gains from each stock, the Treasury taxes those gains at a lower rate. Estimating the gain net of inflation is a complex calculation involving not only the date of purchase, but also additions to capital from reinvestment. So, for simplicity, a lower capital-gains tax rate is one way to make up for inflationary gains.
Most important, capital gains have a lower tax rate to encourage the risk-taking involved in investing. Returns from capital are not the same as getting a weekly paycheck. Investments can vanish overnight, as some currency investors saw when Switzerland unpegged the franc due to changes in market conditions. Some investments never break even. Investors supply the financial capital essential for investments that spur innovation, improve productivity and expand capacity. It is beneficial for society to encourage this risk-taking and tax the proceeds of capital at a lower rate.
Rather than helping the poor, higher taxes on capital are likely to result in fewer realizations — in other words, fewer sales of capital assets — and less investment in capital. Historically, increases in capital-gains taxes have been associated with declines in revenues from capital gains, and vice versa, because those who hold capital can choose when to time their gains.
Capital-gains tax revenues rose after 1997, when the rate was reduced from 28% to 20%, and again after 2003, when rates were reduced further to 15% and double taxation of dividends was ended. The decline in rates resulted in higher tax revenues to Uncle Sam from owners of capital, as they sold assets, resulting in sources of funding for anti-poverty programs and income transfers.
If President Obama were serious about helping the plight of low-income Americans, he would use the power of his office for real effect rather than political posturing. He could rein in the Environmental Protection Agency, which is in the process of forcing states to craft State Implementation Plans to further reduce emissions of ozone and mercury, without proving the benefits of those actions.
Obama could ask his National Labor Relations Board for the legal rationale for calling the parent of a franchise a joint employer, as the NLRB has done with McDonald’s MCD, -0.70% franchises and McDonald’s USA, overturning 50 years of precedent. That step has the potential to destroy the franchise-business model in America, because McDonald’s USA will be responsible for violations of one of its franchises. Many low-income individuals get jobs at franchises, either as managers or entry-level workers.
President Obama could support charter schools and school choice, to enable children to have a better education and qualify to get into the community colleges that he proposes to make free of tuition, even though there is no evidence that the low cost of community college poses a barrier to attendance. And, if cost is a barrier, why not increase financial aid?
Although MIT professor Jonathan Gruber calls the American people “stupid,” they have consistently voted against politicians who promise tax increases. Americans know tax hikes result in slower economic growth and reduced opportunities for everyone. Disguising capital-gains tax increases in class warfare garb won’t make them more palatable.
flash
January 21, 2015 6:35 pm
Rand has all the pretense of an public event ticket taker..and this is not the making of a statesmen.
Count him out as a man with the passion to convert.He’s a sop.
Reality check on Obama’s tax proposals
By Bill Bischoff
Published: Jan 21, 2015 11:47 a.m. ET
Most State of the Union tax deals are DOA
In last night’s State of the Union (SOTU) address, President Obama proposed several significant tax increases that would cost American taxpayers an extra $320 billion over the next 10 years. Some new tax breaks amounting to about $235 billon were also suggested. Here are the emerging but still somewhat sketchy details on the most important proposals.
Higher maximum rate on long-term capital gains and dividends
Under our current rules, the maximum individual federal income tax rate on long-term capital gains and qualified dividends is 23.8% (20% from the “regular” federal income tax plus 3.8% from the Medicare surtax on net investment income). Obama’s SOTU proposal would raise the maximum rate to 28%, which would apparently include the 3.8% Medicare surtax. Before Obama’s presidency, the maximum federal rate on long-term gains and dividends was only 15%. Going to 28% would represent an 87% hike during the Obama years.
Prognosis: As they say in New Jersey, fuggetaboutit. This proposal has no chance in the Republican-controlled Congress.
Tax increase on folks who inherit capital assets
When you inherit capital assets (stocks, mutual fund shares, real estate, coins, stamps, other collectibles, and so forth), our current federal income tax scheme gives you a “stepped-up” basis. Specifically, your basis is stepped up to fair market value on the date of your benefactor’s death (or six months later if the executor of the estate chooses that option). This taxpayer-friendly rule allows heirs to sell inherited assets shortly after they are received and owe little or nothing to the Feds (because you only owe tax on the difference between the sale price and your stepped-up basis). Alternatively, heirs can hold onto inherited assets and pay capital gains tax based only on appreciation that actually occurs during their ownership.
As you can see, the basis step-up rule is a valuable break that is available to anyone who inherits an appreciated capital asset, like a parent’s home or Uncle Fred’s collection of rare baseball cards. But some(including the White House) have characterized the basis step-up rule as a “trust-fund loophole,” which implies that it only benefits the rich. I would bet that the vast majority who have saved taxes under the basis step-up rule are not rich, however you choose to define that.
Obama’s State of the Union in two minutes
(2:00)
If you didn’t catch the whole speech, here’s President Obama’s 2015 State of the Union condensed into two minutes.
Obama wants to repeal the basis step-up rule, which would force heirs to pay federal capital gains tax on the difference between an asset’s sale price and the original owner’s basis, which could be nothing, a little or a lot, depending on how long the asset has been owned.
To avoid penalizing the “non-rich,” the proposal would include exemptions for: assets inherited from your spouse, inherited small family businesses, up to $200,000 of inherited asset capital gains per married couple ($100,000 if you are single), up to $500,000 for a home inherited by a married couple ($250,000 if you are unmarried), and certain inherited personal property such as furniture and heirlooms (but not expensive art or collectibles).
As for those who really are rich, the removal of the basis step-up rule would expose inherited capital assets to both the 40% federal estate tax and the federal capital gains tax, which would be increased to 28% (it’s now 23.8%)if Obama gets his way. Now, you presumably would get a basis increase for the federal estate tax hit on an inherited capital asset. Even so, the effective capital gains tax rate on a greatly appreciated inherited asset could approach 16.8% (28% x 60% = 16.8%). The combined federal estate and capital gains tax hit could approach 56.8% (40% estate tax plus 16.8% capital gains tax). Ouch!
Finally, remember that many “rich folks” have paid millions in federal income taxes along the way before they die. My opinion: losing up to another 57% of your wealth to the Feds just for the privilege of dying is unfair no matter how rich you are.
Prognosis: No chance in the Republican-controlled Congress.
Tax increase on middle-class college savers
Under our current federal income tax rules, Section 529 college savings plans work kind of like Roth IRAs. You contribute money to the account (typically set up for a child or grandchild) without getting any tax deduction. The 529 account is allowed to build up federal-income-tax-free. Then you can withdraw money tax-free to pay for the account beneficiary’s qualified college expense. Good deal!
Although they are eligible to use them, the rich don’t need 529 accounts (because they are rich and because they have better ways to finance college expenses). But middle-class college savers need all the help they can get, and the current tax rules for 529 accounts do provide some help.
Each 529 account withdrawal to pay for qualified college expenses consists partly of contributed amounts and partly of accumulated account earnings. Obama’s SOTU proposal would remove the federal income tax exemption for the earnings part (the contributions part would still be tax-free).
Now, if you need proof that 529 accounts are not just an undeserved tax-saving tool for the rich, know this: according to the Investment Company Institute, there were just under 12 million 529 accounts open in 2014 with about $245 billion in assets. That translates into an average account balance of about $21,000. Billionaires are not lining up to take advantage of these accounts.
Prognosis: It is hard to see how hitting middle-class college savers with a brand-new tax matches up with the overarching SOTU theme of “helping working families.” In any case, this proposal has no chance in the Republican-controlled Congress.
New tax on big financial institutions
Obama proposes a new 0.07% tax on the liabilities (not assets) of the 100 or so U.S. financial institutions with assets over $50 billion. The new tax would be expected to raise $110 billion over 10 years.
Prognosis: Apparently, the theory seems to be that voters won’t realize that this tax would be passed on to them. That said, large financial institutions are not necessarily beloved — even by Republicans. So this proposal could actually gain bipartisan support if it was combined with something Republicans really want — such as the Keystone Pipeline, meaningful corporate tax reform, or a 40-hour work week under the Obamacare employer health insurance mandate rules. Don’t count it!
Retirement plan changes
Obama proposes a new $3.4 million cap on the total amount that an individual could accumulate in IRA and 401(k) type accounts.
Prognosis: No chance.
Employers with more than 10 workers that do not offer a 401(k) type plan would be required to set up payroll deduction IRAs for their employees.
Prognosis: Once again, this idea could gain bipartisan support if it could be combined with something Republicans like. Not likely.
New and expanded tax credits for working couples
Obama proposes a new $500 tax credit for married couples when both spouses work: a so-called second-earner credit. The credit would help offset extra costs for childcare and commuting that often discourage having both spouses work.
Obama also proposes to increase the credit for childcare expenses so parents can work to $3,000 per qualifying child. Under the current childcare credit rules, the maximum credit is $1,050 for one child or $2,100 for two or more. However, the credit is reduced if you have more than a very modest income. As a result, the credit for most folks is currently limited to $600 for one child or $1,200 for two or more.
Prognosis: Combine these things with something Republicans like or “turn the page.”
The bottom line
Realistically, I don’t think any of these proposals can be enacted before the 2016 presidential election. Some might have bipartisan support under the right circumstances. However, based on past performance, those circumstances are extremely unlikely to occur during Obama’s remaining two years in office.
Opinion: Obama’s joke of a tax plan only fuels class warfare
By Diana Furchtgott-Roth
Published: Jan 21, 2015 11:58 a.m. ET
Americans are interested in tax cuts, not hikes
If President Barack Obama really wished to help lower-income Americans, he would push through reforms in education, labor relations and the environment.
You have to hand it to President Obama.
Despite Democrats’ loss of the House of Representatives in 2010 and the U.S. Senate in 2014, as well as the loss of 16 statehouses and 10 governorships since Obama’s election in 2008, he keeps advocating for tax increases.
The latest proposal was in Tuesday’s State of the Union Address, where the president proposed raising the top tax rate on capital gains and dividends to 28% from the current 24%. When the president took office in 2009, that rate was 15%.
Obama’s capital-gains proposals are likely motivated by a desire to continue to beat the class-warfare drum. Consider that those tax increases are not part of a serious legislative agenda. Obama has not coordinated this proposal with congressional Democrats, much less congressional Republicans, as part of some tax-reform package.
Lowering taxes is more popular with the American people than raising them, and few politicians who advocate tax hikes are elected to office. Yet Obama plows ahead anyway. Give him an A for persistence, even though he gets an F in helping his party and boosting the economy.
Note also that one sensible part of Obama’s tax proposal, doing away with “stepped-up basis,” a provision that allows an asset’s capital gain to be reset to zero when it’s passed on to heirs at an owner’s death, is couched in class-warfare terms. Obama calls this “the trust fund loophole,” but this is political posturing. Most people who gain from step-up in basis do not have trust funds, and trust funds benefit from many tax provisions other than the step-up in basis. Plus, eliminating step-up in basis can be done without raising tax rates.
There are real reasons why capital is taxed at a lower rate than labor.
If Obama were serious about helping the plight of low-income Americans, he would use the power of his office for real effect rather than political posturing.
Dividends have a lower tax rate because corporate earnings have already been taxed. Taxing dividends, distributions from corporate earnings, is the second time such income has been taxed. Some people might say it is the third time, because the income to purchase equity in a company has already been taxed once under the individual income tax, but that is a subject for another day.
The statutory federal corporate tax rate is 35%, although effective tax rates vary by firm, depending on the amount of plant and equipment purchased, among other factors. If a company pays dividends out of net income, then a 35% corporate tax rate plus a 28% individual tax rate on dividends adds up to a total federal tax rate on dividends of 53%. State and local taxes can bring the tax higher.
Capital gains are taxed at a lower rate because, depending on when the original asset was purchased, they might have a substantial inflationary component. Many people hold on to capital for years before selling it and Congress decided that they should not be taxed on the artificial gains from inflation. Rather than calculating the inflationary gains from each stock, the Treasury taxes those gains at a lower rate. Estimating the gain net of inflation is a complex calculation involving not only the date of purchase, but also additions to capital from reinvestment. So, for simplicity, a lower capital-gains tax rate is one way to make up for inflationary gains.
Most important, capital gains have a lower tax rate to encourage the risk-taking involved in investing. Returns from capital are not the same as getting a weekly paycheck. Investments can vanish overnight, as some currency investors saw when Switzerland unpegged the franc due to changes in market conditions. Some investments never break even. Investors supply the financial capital essential for investments that spur innovation, improve productivity and expand capacity. It is beneficial for society to encourage this risk-taking and tax the proceeds of capital at a lower rate.
Rather than helping the poor, higher taxes on capital are likely to result in fewer realizations — in other words, fewer sales of capital assets — and less investment in capital. Historically, increases in capital-gains taxes have been associated with declines in revenues from capital gains, and vice versa, because those who hold capital can choose when to time their gains.
Capital-gains tax revenues rose after 1997, when the rate was reduced from 28% to 20%, and again after 2003, when rates were reduced further to 15% and double taxation of dividends was ended. The decline in rates resulted in higher tax revenues to Uncle Sam from owners of capital, as they sold assets, resulting in sources of funding for anti-poverty programs and income transfers.
If President Obama were serious about helping the plight of low-income Americans, he would use the power of his office for real effect rather than political posturing. He could rein in the Environmental Protection Agency, which is in the process of forcing states to craft State Implementation Plans to further reduce emissions of ozone and mercury, without proving the benefits of those actions.
Obama could ask his National Labor Relations Board for the legal rationale for calling the parent of a franchise a joint employer, as the NLRB has done with McDonald’s MCD, -0.70% franchises and McDonald’s USA, overturning 50 years of precedent. That step has the potential to destroy the franchise-business model in America, because McDonald’s USA will be responsible for violations of one of its franchises. Many low-income individuals get jobs at franchises, either as managers or entry-level workers.
President Obama could support charter schools and school choice, to enable children to have a better education and qualify to get into the community colleges that he proposes to make free of tuition, even though there is no evidence that the low cost of community college poses a barrier to attendance. And, if cost is a barrier, why not increase financial aid?
Although MIT professor Jonathan Gruber calls the American people “stupid,” they have consistently voted against politicians who promise tax increases. Americans know tax hikes result in slower economic growth and reduced opportunities for everyone. Disguising capital-gains tax increases in class warfare garb won’t make them more palatable.
Rand has all the pretense of an public event ticket taker..and this is not the making of a statesmen.
Count him out as a man with the passion to convert.He’s a sop.
correction: Rand has all the presence..
Flash
They said the same thing about his dad.