Tax Quote of the Week
"To extinguish a debt which exists and to avoid contracting more are ideas almost always favored by public feeling and opinion; but to pay taxes for the one or the other purpose, which are the only means of avoiding the evil, is always more or less unpopular. These contradictions are in human nature."
-- Alexander Hamilton
White House Budget Changes Taxes
On February 1, 2010, the White House released the budget for fiscal year 2011. The budget projects a spending level of $3.8 trillion and a deficit of $1.56 trillion.
President Obama spoke in support of the budget. He indicated that the budget choices were challenging. He stated, "It's time to save what we can, spend what we must and live within our means."
The budget includes many provisions that will affect taxes. Some provisions will reduce taxes during the next decade. Others will increase taxes. Finally, there are some provisions such as the estate tax, which include both increases and decreases.
Tax Reductions
The most expensive tax reduction is to retain the existing brackets for the 10%, 15%, 25% and 28% rates. These current brackets reduce taxes for middle-income Americans. The "Making Work Pay" credit is also proposed to be extended for one year. This credit reduces withholding for most workers.
The budget also contemplates an expense of $46.7 billion for "tax extenders." The tax extenders include the teacher's deduction, various business credits and the IRA charitable rollover.
Tax Increases
Top current tax rates of 33% and 35% will be increased in 2011 to 36% and 39.6%. These increases apply to single persons with incomes over $200,000 and married couples with incomes over $250,000. There will also be an increase from 15% to 20% in the tax rate on capital gains and dividends, which will be taxed at ordinary income rates up to 39.6%.
During the past three years, the 3% floor on itemized deductions for upper-income persons and phase out of personal exemptions have been eliminated. Restoring these provisions will also increase taxes on higher-income households in 2011.
The White House again made a proposal that was not successful last year in the United States Senate. The budget proposes that higher-income individuals be restricted from benefiting from deductions to the extent that their tax bracket exceeds 28%. If this 28% cap is enacted, major charitable donors to capital campaigns will lose part of their tax savings.
This proposed limit on tax savings from charitable gifts by higher-income taxpayers were previously met with strong opposition. The Senate overwhelmingly passed a 2009 bill by Sen. Robert Bennett (R-UT) that rejected the concept. Sen. Bennett stated, "The Senate sent a clear message to the President that we do not support increasing taxes on charitable contributions."
Sen. Bennett noted that charities "benefit greatly" from donations made by individuals in high brackets. He suggested that the 28% cap on itemized deductions would have major negative impact on charities.
Taxes Up and Down
The White House budget proposes an estate tax exemption of $3.5 million and tax bracket of 45%. In effect, the 2009 estate tax rules will be extended.
The $3.5 million exemption/45% tax rate would be an increase from the present 0% estate tax rate, but it would be a decrease from the scheduled 55% estate tax rate that is to be effective on January 1, 2011.
Democratic Praise for White House Budget
Democratic Senators and Representatives were supportive of the new White House budget. Sen. Budget Chair Max Baucus (D-MT) stated, "The job creation funds allocated in this budget will help rebuild the foundation of our economy -- the middle class. They will help small businesses hire more workers and provide assistance to individuals, businesses and families to get through the recession."
Sen. Baucus also supported the proposed changes and increases on companies with international operations. He did not comment directly on the income tax increases.
Sen. Baucus did make reference to the estate tax. In December, 2009, he was unable to pass an extension of the 2009 estate tax rules because two Democratic Senators and most Republicans supported a $5 million exemption and 35% top estate tax rate. Sen. Baucus noted, "Several Members of this Committee – notably Senators Lincoln, Cantwell, and Kyl – have been working hard on their proposals in this area, as well."
Senate Majority Leader Harry Reid (D-NV) was also pleased with the White House proposal. He indicated that he supported the "middle-class tax cuts" that will benefit families. He also stated that the budget "will continue Democrats' efforts to reduce the deficit and restore fiscal responsibility."
Sen. Kent Conrad (D-ND) is Chair of the Senate Budget Committee. He believes that the 2010 budget and deficit were essential to save an economy "on the brink of collapse," but that there need to be changes in the future. Sen. Conrad indicated that in the future the Senate will need "to focus on controlling our debt."
Finally, Chair of the House Ways and Means Committee Charles Rangel (D-NY) stated, "It is abundantly clear that we must find some way to build confidence in our economy, particularly for small businesses." Chairman Rangel was generally supportive of the small business credit of $5,000 per job for hiring new workers. He also hoped that he and the Ranking Republican Dave Camp (R-MI) could work together to find bipartisan tax solutions for next year.
Republican Response to White House Budget
Sen. Charles Grassley is the Ranking Republican on the Senate Finance Committee. He responded that the White House is downplaying "the effects of raising taxes on small business owners." In his view, the increase in income tax rates to 36% and 39.6% will impact at least half of small business owners with 20 or more employees. His staff notes that 20 million workers are employed by these businesses. With the increased tax rates, Sen. Grassley sees a "real disconnect between the administration's stated interest in helping small businesses and creating jobs" and the higher taxes.
Sen. Judd Gregg is the Ranking Member on the Senate Budget Committee. He and Sen. Conrad have been advocating budget restraint to reduce the deficit. Sen. Gregg exclaimed, "This country is sinking into a fiscal quagmire – the President's stimulus plan has not resulted in job growth, this year's deficit is expected to reach $1.6 trillion and Congress just agreed to extend the federal credit limit to more than $14 trillion." Sen. Gregg calls the new budget "more spending, more borrowing and more taxes." His view is that the new budget fails to make significant progress toward deficit reduction.
Key House Republicans also shared similar concerns. House Minority Leader John Boehner (R-OH) believes that the budget "spends too much...taxes too much...and borrows too much." The budget of $3.8 trillion is up 30% in just three years time compared to 2008. There are approximately $2 trillion in tax increases over the next decade that will particularly harm small business owners. Finally, the $1.6 trillion deficit plus another $9 trillion in estimated deficits over the decade will result in a tripling of national debt from 2008 to 2019.
Finally, Rep. Dave Camp (R-MI) is the Ranking Republican on the House Ways and Means Committee. He observes that the stimulus bill was not particularly successful. He noted, "Instead of creating 3.5 million jobs as Democrats promised, we have since witnessed the elimination of nearly three million more jobs." Rep. Camp is also concerned about the increasing federal debt and the impact of higher taxes on job creation.
Editor's Note: Your editor and this organization take no specific position on any of the Democratic or Republican comments. We offer a balanced view of both sides as a service to our readers.
