You don’t have to read too heavily into President 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 percent 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 their unflappable opposition to 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 former Treasury official. But it could earn Obama some major points on the campaign trail, which likely was his goal all along, Sullivan says.
Here’s a breakdown of the most striking tax changes for top earners included in Obama’s 2013 budget.
1. 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 percent, from its current 35 percent. Republicans want to keep the tax cuts for top earners too, 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.
2. A 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 called to increase dividend income tax rates from the current 15 percent to 20 percent. But under his 2013 budget, the wealthiest taxpayers and businesses, who now pay a 15 percent tax rate on dividend income, would see their dividend rates rise to as high as 39.6 percent if the Bush-era tax cuts expire, or 43.4 percent including another new tax on unearned income that could affect a small group of taxpayers (see No 7 below).
3. …and on Capital Gains, Too
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 percent to 20 percent, 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 401(k)s, 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 percent of taxpayers, like Mr. Buffett or presidential hopeful Mitt Romney, according to an analysis by Forbes. More than 80 percent has gone to the top 5 percent of earners.