The President's budget plan which he sent to Congress on February 26 gives "a pretty good feel for where the Obama administration will try to go in terms of tax policy," said Clint Stretch, managing principal of tax policy at Deloitte Tax in Washington DC, speaking to the media on a conference call Thursday. The proposed budget calls for a "significant" tax increase on businesses, and higher taxes for individuals earning more that $250,000. The budget assumes that the AMT patch will continue to be passed each year and makes tax cuts that were part of the stimulus package permanent, such as the $800 cut in taxes to working couples. Analysis of the revenue tables would indicate that the tax increases will not begin until 2011, Stretch said.
The largest item of business tax increase will be $200 billion that will come from implementing reforms and enforcement of international tax law. Details about how this proposal will work are not yet available, but will be provided by the Treasury Department early next month. Tax breaks for the oil and gas industries will be eliminated, which is consistent with the President's campaign proposals. Carried interest will no longer be taxed as capital gain but as ordinary income, a proposal that will affect hedge fund managers and owner of private equity funds.
Analysis of the revenue tables shows revenue from the estate tax will remain at current levels so that in a "worst case scenario," Stretch said, there would be a freeze in current law.
Tax rates for individuals in the top two brackets will increase to 36 percent and 39.6 percent in 2011, up from the 33 percent and 35 percent. Capital gains and dividend taxes for individuals in those brackets will increase to 20 percent. Capital gains rates will be frozen at the 2003 level of 15 percent for taxpayers in the lower brackets.
High income taxpayers will get a "real haircut" in itemized deductions, which will be limited to 28 percent of income. A comparison of Tax Liabilities Summary provided by Deloitte shows that a single person earning $500,000 would see an increase of $19,200 in taxes in 2011. A married couple with the same earnings and with two children under age 17 would see an increase of $11,300.
Scenario #1, for the single person earning $500,000, shows an increase of $7,800 attributable to higher rates, $3,200 from the restoration of limitations of itemized deductions and personal exemptions, and a limit of tax benefits for itemized deductions of $8,200, for a total tax liability of $140,700, up from $121,500.
Scenario #2, the family of four is currently paying AMT. Increases in taxes under the budget plan would be attributable to increased tax rates, restoration of limitations of itemized deductions and personal exemptions. The limit of tax benefit for itemized deductions removes AMT liability and places taxpayer in a regular tax liability position.
NOL relief which was eliminated from the stimulus package is included in the budget plan.