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May 22, 2013 at 10:48 AM
President Barack Obama’s current tax proposals don’t appear likely to win congressional approval, though a variety of popular wealth transfer techniques may be curbed as part of a budget compromise needed to raise the nation’s debt limit.
That is the view of analyst Andy Friedman in The Washington Update’s latest white paper. The report comes after Congress reached its borrowing limit on May 18, thus setting up a fresh round of negotiations to raise the nation’s debt ceiling.
Because the Treasury can continue to pay bills with current tax receipts for another four months or so, Congress has until the early fall to agree on a new budget, and, as has become the norm in Washington, the two parties’ budget proposals “are opposite in almost every regard,” Friedman writes.
In general, the Democrats are seeking to cut defense and raise taxes while the Republicans want to cut nondefense spending, avoid new taxes and reform entitlements.
Specifically, the GOP is seeking to slow the rate of Social Security spending through a modified (“chained”) consumer price index and to increase Medicare premiums for the wealthy.
Friedman says the president is willing to accept these entitlement reforms if the GOP will agree to new taxes, but in his view the current political environment is not favorable to most of the president’s proposals.
Those tax changes include a 28% limitation on tax exemptions and itemized deductions. This means a taxpayer in the 35% bracket would get a lesser (28%) tax benefit in itemized deductions for mortgage interest, charitable contributions and state taxes.
The cap would also apply to tax exemptions such as employer-paid health premiums and municipal bond interest, meaning that a person in the 35% bracket would pay a 7% tax on each of these items, which Friedman regards as unlikely to pass legislative muster:
“Taxing health insurance premiums is contrary to the goal of the health care reform law to have employers provide coverage for their employees,” Friedman writes. “And taxing municipal bond interest would raise the borrowing costs of the states, most of which are not in a position to absorb those higher costs.”
The president also proposes adoption of the “Buffett rule,” which would would set a minimum tax of 30% on taxpayers with adjusted gross income of $1 million or more. Friedman expects Republicans to block this change, which “would effectively eliminate for millionaries the benefit of the lower tax rates for dividends and capital gains income.”
The retirement plan lobby and many financial advisors are up in arms about another Obama proposal to limit the maximum accumulation in retirement accounts to the sum that produces an annual annuity of $200,000 at age 62, currently amounting to $3.4 million. Friedman considers passage unlikely.
The president’s proposal on estate, gift and generation-skipping exemption amounts would undo the fiscal cliff compromise just reached before the turn of 2013.
That compromise adopted (on an inflation-adjusted basis) the exemption prevailing in 2010, shielding estates smaller than $5.25 million and taxing amounts above that at 40%.
