By Richard Rubin and Steven Sloan - Feb 14, 2012 2:59 AM GMT+0700
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Republican senators, lfet to right, David Vitter from Louisiana, Jeff Sessions from Alabama, Jerry Moran from Kansas, and John Barrasso from Wyoming prepare a response to the President Obama's 2013 budget proposal in Washington on Feb. 13, 2012. Photographer: Jim LoScalzo/EPA/LANDOV
President Barack Obama’s budget plan calls for taxing dividends received by high-income taxpayers as ordinary income, raising the top rate to 39.6 percent from 15 percent as part of a $1.4 trillion tax increase on top earners over the next decade.
The proposal, in the president’s fiscal 2013 budget released today, would reverse his previous policy that called for taxing dividends more lightly than wage income. The plan would treat dividends as ordinary income for married couples making more than $250,000 a year and individuals making more than $200,000. The dividend tax proposal would raise $206.4 billion over 10 years.
“We simply can’t afford to devote $206 billion for lower tax rates for the highest-income Americans,” Gene Sperling, White House director of the National Economic Council, told reporters today. “Our system for taxing investment income for the most well-off Americans is clearly broken.”
Obama is proposing a top individual income tax rate of 39.6 percent in 2013, up from 35 percent. His budget would tax capital gains at a top rate of 20 percent, up from 15 percent. The top dividend tax rate is now 15 percent.
An additional 3.8 percent tax on the unearned income of couples earning $250,000 and individuals making at least $200,000 will take effect in 2013 as part of the 2010 health- care law. As a result, some taxpayers would pay 43.4 percent in federal taxes on their dividends next year, almost triple what they now pay.
Pre-2003 Taxation
The proposal reverses the administration’s policy and would return dividend taxation to its pre-2003 status. The administration’s fiscal 2012 budget had justified setting the top capital gains and dividend tax rates at 20 percent because it “reduces the tax bias against equity investment and promotes a more efficient allocation of capital.”
The proposal is part of Obama’s attempt to tap the wealthiest Americans to reduce the federal budget deficit.
“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said in a speech at Northern Virginia Community College in the Washington suburbs today.
Along with the rest of the administration’s proposed tax increases, the change in the dividend tax will probably run into resistance from Republicans and business groups. A coalition of companies, including AT&T Inc. and United Parcel Service Inc. (UPS), has been lobbying to maintain the rates on capital gains and dividends.
Policy Difference
Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington, said the administration’s proposal to tax dividends at higher rates than capital gains is surprising, because capital gains tend to go to people with the highest incomes.
“What is the policy difference that the administration has suddenly found between qualified dividends and capital gains?” he said. “Why do they get different rates now?”
The administration also wants to impose a 30 percent minimum tax for individuals with annual incomes of at least $1 million, known as the “Buffett rule” after billionaire investor Warren Buffett, who originated the idea last year.
That would replace the alternative minimum tax, “which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended,” the administration said.
Tax Code Rewrite
Sperling said the AMT would be eliminated as part of a broader rewrite of the U.S. tax code. The administration hasn’t made such a proposal, and the budget released today didn’t include repealing the AMT or imposing the Buffett rule.
Buffett, in a New York Times opinion article in August, said that in 2010 he paid a lower tax rate -- 17.4 percent -- than “any of the other 20 people in our office.”
The budget proposal doesn’t say how much revenue the Buffett rule would generate and it doesn’t provide details on how the rule would affect individuals’ tax calculations. The U.S. collected $39.1 billion from the alternative minimum tax in 2011, according to projections from the Tax Policy Center, a nonpartisan research organization in Washington.
The AMT, in its current form since 1986, requires taxpayers to compare their tax liability under the regular code with their liability under the alternative minimum regime. Because the AMT doesn’t allow the full benefits of state and local tax deductions or personal exemptions, people with large families or who live in high-tax states tend to be disproportionately affected.
Millions of Taxpayers
The exemption levels aren’t permanently indexed for inflation. Unless Congress acts to blunt its spread, millions more taxpayers will pay the alternative tax next year. If Congress doesn’t act, the number of people paying the AMT will jump from 4.3 million to 31.2 million, according to the Tax Policy Center.
Obama’s budget revives calls to allow the 2001 and 2003 tax cuts on income and capital gains to expire at the end of 2012 for families earning more than $250,000 a year and cap itemized deductions and other tax benefits for these families at 28 percent.
The list of capped tax breaks includes municipal bond interest and employer-sponsored health insurance. In the budget, the administration expanded the proposal to include contributions to tax-advantaged retirement accounts such as 401(k) plans.
“The recycled and rejected tax hikes on the top two brackets would come at the expense of small businesses,” Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, said in a press release. “If the president is committed to reforming our tax code, why in the world would he discuss putting in place a new version of the failed alternative minimum tax?”
Private Equity Managers
The president’s plan would tax the profits-based compensation paid to private equity managers at ordinary income rates instead of a preferred 15 percent rate. It also would curtail tax breaks for corporate jets and oil and gas companies.
Obama reintroduced previous years’ proposals to limit companies’ ability to defer taxation on income earned overseas. He proposed new breaks for businesses that hire more workers, manufacturers and companies that bring jobs into the U.S.
Separately from the budget, Obama is proposing an overhaul of the corporate tax system that would eliminate tax benefits to lower the top corporate rate from 35 percent. The administration plans to release more details on its corporate tax framework by the end of the month.
To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net
To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net
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