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7 ways Obama would tax the rich

The president seeks to raise $1.5 trillion in the next 10 years from wealthy Americans. Yet most of his proposals were also in last year's budget and went nowhere.

By MSN Money Partner Feb 17, 2012 11:12AM
This post is by Michelle Hirsch of The Fiscal Times. don’t have to read too heavily into President Barack Obama’s 2013 budget proposal to grasp his bottom line: America needs to ramp up investments in education, green energy and housing -- and the nation’s highest-earning individuals and businesses should pay for it.


It’s a familiar refrain from Obama, who this year reprises many of the same tax-the-rich principles from last year’s budget blueprint in order to raise a projected $1.5 trillion in new revenue over the next decade. 


On the business side, repeat performances include calls to rid the tax code of the more than $41 billion in tax breaks for oil and gas companies and to subject the slice of profits investment fund managers take home to ordinary income tax rates instead of the 15% capital gains rate they currently pay.


Most of this year’s revenue-producing proposals are aimed squarely at America’s most affluent individual taxpayers, which the White House defines as individuals earning more than $200,000 a year or couples making more than $250,000.


With the exception of a new provision to tax dividends as ordinary income, all of the document’s proposals to tax wealthy individuals more were part of last year’s budget and were swiftly knocked down by House and Senate Republicans, who continue to oppose any kind of tax hike. "So much like in 2012, this likely won’t actually mean much change for the wealthy folks," says Martin Sullivan, a contributing editor at Tax Analysts and a former Treasury official. (Post continues below.)

But it could earn Obama some major points on the campaign trail, which likely was his goal all along, Sullivan says.


Here’s a look at some of the most striking tax changes for top earners included in Obama’s 2013 budget:


Ending the Bush-era tax cuts 

The tax cuts signed into law by President George W. Bush are set to expire at the end of the year. Obama would extend them for the middle class, but allow them to end for those making more than $200,000 a year or couples making more than $250,000. The top rate would return to 39.6%, from its current 35%.


Republicans want to keep the tax cuts for top earners, setting up a battle that we’ve seen before. The last time, in 2010, Obama agreed to extend all the Bush-era tax cuts for two years, setting up this potential second showdown.


Higher rate on dividend income


The new budget plan would raise $206.4 billion over a decade by taxing dividends as ordinary income for high earners. In past budgets, Obama has sought to increase dividend income tax rates from the current 15% to 20%. But under his 2013 budget, the wealthiest taxpayers and businesses, who now pay a 15% tax rate on dividend income, would see their dividend rates rise to as high as 39.6% if the Bush-era tax cuts expire, or to 43.4% if an additinoal new tax on unearned income that could affect a small group of taxpayers is also included (see below).


High capital gains rate


In his 2013 budget proposal, Obama again seeks to hike the tax rate on long-term capital gains -- meaning profits from investments and real estate -- from 15% to 20%, a change that he also called for last year.


While this change would affect all investors, those in the middle class tend to hold their stocks and bonds in tax-sheltered retirement accounts like IRAs and 401ks, meaning the effects of such a hike would fall largely on the wealthy, who derive a greater share of their income from their investment holdings.


Over the past 20 years, about half of all capital gains have gone to the wealthiest 0.1% of taxpayers, like billionaire investor Warren Buffett and presidential hopeful Mitt Romney, according to an analysis by Forbes. More than 80% has gone to the top 5% of earners.


The 'Buffett rule' 

As promised in his State of the Union address last month, Obama would create an alternative minimum tax of 30% to be levied on anyone earning more than $1 million a year. The president dubbed the change "the Buffett rule" after Buffett, who wrote a scathing editorial in The New York Times criticizing the U.S. tax system for "coddling" investment moguls, allowing them to pay a smaller share of their income in federal taxes than middle-class taxpayers.


It would be meant as a total replacement for the current alternative minimum tax. Although the White House mentions the Buffett rule in its 2013 budget, it doesn’t detail exactly how it would structure this new tax, and doesn’t provide estimates on how much it would add to federal coffers. But a Fiscal Timesanalysis of Internal Revenue Service data from earlier this month found that the Buffett rule could bring the federal government additional revenue of at least $30 billion.


Estate tax redux 


If a loved one passes away this year, the car, home, or other assets left behind would be taxed at a lower rate than they would be in 2013 under Obama’s proposal. The current estate tax rate is 35%, with an exemption of $5.12 million in assets -- a level that Obama and congressional Republicans agreed on in December 2010 as part of a deal to extend the Bush-era tax cuts until the end of 2012.


While many Congressional Republicans would like to eliminate the estate tax altogether, Obama suggests it as a revenue-raiser in his 2013 budget and bumps the tax rate up to 45% and knocks the exemption down to $3.5 million. That change alone would bring the Treasury $968 billion in revenue over 10 years.


Cutting deductions


The president’s budget proposal includes a change that the charitable and housing industries feared: a limit on how much donating to charity or taking out a home mortgage can shave off an itemizer's tax bill.


State and local governments could also get burned, since the cap applies to high earners who deduct the interest they pay on municipal bonds. A major reason why investors take on state and local debt is to reap the generous interest exemption they can log on their taxes from it. State and local governments fear the limit might lead high earners to invest elsewhere. 


High-income taxpayers in the top two income brackets can deduct 33% or 35% of qualified expenses at year's end. But Obama proposes capping that amount at 28% for any filer who earns more than $200,000 (or $250,000 for a couple).


This change would slash the federal deficit by $584 billion over a decade, the White House said. It’s hard to predict how much the cap could reduce charitable giving, homeownership and the popularity of munis, but advocates for those interests say the proposed change could rock state and local governments as well as the charitable and housing sectors.


Tax on unearned income


The health-care reform law the president signed back in 2010 included a Medicare tax of 3.8% on investment income for high earners. That tax is set to kick in next year and would be levied on income derived from investments, including capital gains, dividends, rental properties and the sale of real estate -- but only for a very small number of taxpayers and only on gains exceeding some pretty high thresholds.


For sales of primary homes, the tax would apply only to any gains above $250,000 for an individual or $500,000 for a married couple. "In its first year of application, 2013, the new Medicare tax will hit approximately the top-earning 2% of families," the Tax Foundation noted in a 2010 report.


More from The Fiscal Times and MSN Money:



Feb 17, 2012 11:55AM
The fact that some very wealthy people pay little or no taxes is merely a symptom of a broken tax system.  The entire tax code needs to be thrown out and replaced by one that is simple and fair.  Instead of 50,000 pages, it should be 1 or 2 pages.  It won't happen until after the election (if ever), and it must be a bi-partisan effort with no lobbyists in the room.  LOL
Feb 17, 2012 5:51PM

I am so sick of this 200/250k number that the President pulled out of thin air while on the campaign trail.  This will continue to destroy the middle class and small buisness owner - the very people he is touting to save.


Don't think so?  Ask people that live on either coast or small business owners that earn this amount.


Lastly, it is my personal opinion that an individual or buisness should not be forced to give almost 40% of their earnings to thier government, period. 


If the governmnet would like to create more programs but can't afford it, then it's time to make custs, not increase taxes.  The old addage goes the more you make, the more you spend....So when is enough, enough?  50%? 60%?  Increase the net and now include 100/150k earnings?  80/85k earnings? 


This is not concerning, it's scary!

Feb 17, 2012 5:17PM
Problem with Dems tax and spend is just that..... it won't reduce the deficit. Everyone knows,
even the writer, that you can raise taxes to cover the spending increases but cuts are necessary
to reduce the deficit. Everyone knows once the government gets your money, it will be spent.
Feb 17, 2012 2:05PM
Charities get a lot of donations at the end of the year from the rich and tax planning. This will be reduced dramatically. Obama started with millionaires paying their fair share. Now it is down to $200,000. It will change again to $100,000 when he does not have enough money. The correct amount of fair share will be when he can give government aid to over 50% of the public so he can get the votes.
Feb 17, 2012 5:15PM

What's to understand about his budget?

A big surprise, he wants to tax the hell out of anyone who earns a wage and then turn around and give it to his base of beggars, so they can relect him.



Hard to figure?

Why no, it's not

Feb 17, 2012 4:29PM
What will the progressives do when they run out of other peoples money?

When you reward the lazy you just get more lazy people that will vote for those who keep then on the dole.  They think they don't pay any taxes, but in the bright light of basic economics, they pay a lot of taxes.  They are just too ignorant to realize it.

Feb 18, 2012 10:10PM
Obama has turned this country against each other like no other president ever has.  Class envy is the easy way to get votes.
Feb 19, 2012 12:49PM

Go to any IRS website to find out that this article is BS. The top 1% already pay most of the taxes!! The bottom 50% pay under 3%.

Feb 19, 2012 4:07PM

Why don't Americans understand that a ten (10) year income of $1.5 T Increase in taxes only covers One Tenth (1/10) of the Annual $1.5 Trillion Deficit.


By this logic we will ADD another $ 8.5 Trillion in debt over the next 10 years WITH the $1.5 Trillion Tax Increase.  Oh, I know why most Americans don't understand this.  Most Americans don't use a budget. 


Getting rich on the Back of someone else is in most cases pure BS.  In any system about 20% of the people are the doers, the innovators, the investors, the get up and do what needs to be done when the option is to shop, play, apply for benefits.  It is called an Economic Rule, look it up.  When the rain pours the shopping centers, theatres, etc. fill.  When it showers lightly absentee at work, school, church laggs.


The Pres always goes against Economic Rules/Laws.  Look it up.

Feb 19, 2012 4:05PM
We need to get back to basics here.  Quit using the tax code for social engineering, economic cronyism, political pet projects, and to reward campaign contributors. Pass a balanced budget amendment that requires tax revenues to equal expenditures except during major economic meltdowns.  Eliminate or cap most deductions and credits, tax all income equally, and reduce overall tax rates. Substitute a consumption tax for corporate and payroll taxes.  After all, corporate taxes are passed through to consumers now, and payroll taxes hit moderate income workers and self-employed people the hardest.
Feb 21, 2012 8:02AM
Fact check! Last years Obama budget got 0 votes in the senate. This means even his own party thought it was over the top.
Feb 20, 2012 10:03AM
Wake up people; "Fair Share" is a fallacy! Fair is the opinion of the one doing the judging. 
If the Buffet Rule was in effect for 2011 I wonder how much Warren and his secretary would pay in taxes?
Feb 21, 2012 10:15AM
Perfect recipe for disaster. But then that is Obama's plan. As a Socialist, he wants everyone except the self-appointed aristocrats in his party to be equally poor. He is trying to turn this country into the largest debtor nation in the world with a majority dependent on government for their survival. He is more than the typical tax and spend liberal. He is a tax and destroy Socialist.
Feb 21, 2012 11:39AM

RE: Dennis "GOP are the 1%ers in Congress."...

You should fact check before you type bud. 


Of the TOP 10 wealthiest members in Congress as compiled by Roll Call; #1, #2 and #10 are Republicans.  #3, #4, #5, #6, #7, #8, and #9 are Democrats.  So 70% D vs. 30% R in the top ten.


And as for the budget not being passed.  If you took a budget to your spouse that borrowed a hefty amount to cover you expenditures because your income didn't cover all you wanted to buy that year--how would that work out??


I make a decent living (of more than median, but way less than $100k).  I've saved money from an early age--I participated in the 401k at my first job as a senior in HS.  It's personal responsibility and not living beyond my means that makes sense to me--and should to the rest of the country.  Presidents and Congress members included.


Feb 20, 2012 4:11PM
Ask the 99% whether or not they would complain about the proposed tax hike on the wealthiest 1% if they had the opportunity to make that much money themselves.  i bet most would be glad to pony up the taxes.  You can't eat well at minimum wage but you can eat well and have much leftover making over a million a year.  Go to the local food store and buy a nice fresh loaf of Italian specialty bread at $4.29 a loaf.  But if that food store is paying an employee $5.95 per hour he/she would have to work one full hour for a loaf of bread.  That sucks no matter how much you make.
Feb 22, 2012 4:00AM

I'm all for getting rid of exemptions, but I mean ALL of them! We should have a flat 10% tax on all income with zero exemptions. (Yes, poor people are also citizens and should pay tax.) Then the government should figure out how to live on that, period. Why 10%? Because even God didn't ask for more than 10%. Who do they think they are?

Feb 22, 2012 8:36AM

Maybe people would take Obama's budget seriously if it actually contained any meaningful spending cuts.


As another poster said earlier---do the math, people. All these proposed tax increases and they still won't come anywhere CLOSE to balancing the budget. What does it tell you---GOVERNMENT SPENDS TOO MUCH.


But raise taxes on the rich sounds better and it's more likely to get Obama reelected. Never mind the fact that it won't actually do much to create jobs and help the economy.

Feb 20, 2012 4:23PM
DCbuffalo.  They have the opportunity, they won't do the work to get there.  They want to take more from others and that somehow makes it right. 
Feb 17, 2012 7:47PM

Interest, dividends and capital gains - free of tax up to 10,000

  Above that - tax at ordinary rate, including sale of home & muni interest

Remove the threshold for SS on wages/SE income (like medicare)

Top mortgage interest deduction - $12,000 / yr

Top charitable contribution - $13,000 /yr (indexed with the gift tax exclusion threshold)

  Don't expect a broke government to subsidize your McMansion and if you are going

  to be a philanthropist, you are going to do it despite any tax benefit, in fact, if you are giving

  more than that away, you aren't needing any help.

Institute RMD for Roth (max acct value $500,000 - above that no more tax free growth)

  Distributions ratably weighted non-taxable to taxable

  No sparing these accounts and passing them on to the grandkids as a tax advantage

Equalize contribution max for Trad IRA, 401k and SAR/SEP (all equal max contributions)

Scrap bonus depreciation and return to reasonable levels for sec 179

Eliminate step-up in basis

Not too much of this harms low/middle class....equalizes earners vs investors

and keeps the middle engaged in the economy.

Feb 20, 2012 6:12PM
The first rule of personal finances, is to pay yourself first, or otherwise save. Every 1%er has no problem saving. But very few of the 99%ers can save at all. Of the ones that can they invest in their 401ks, where the Wall st. 1%ers steal it right back. If you own a 401k you know that you never get to vote your shares, the 1%ers on wall st. vote them for you, tha'ts why your 401 looks like s--t. The system is broken, but don't ever think a 1%er is going to fix it in your favor.
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