Last night, I parked myself on the couch just in time for President Obama’s State of the Union Address. As a tax geek, I was excited to hear his proposals for comprehensive change to the Internal Revenue Code. I was excited to hear if he had solidified plans for the much-discussed “Buffet Rule.” I was, perhaps, most excited to hear if he would fan the flames of the perceived inequities in this country by highlighting the 13.9% effective tax rate paid by his chief opposition, leading Republican candidate Mitt Romney. This would be an address, I believed, that could change both the future of our country, and from a selfish perspective, my career.
But then I noticed Teen Wolf was on AMC, so I bagged the address and watched that instead. Hey, I’m only human.
I kid, I kid. I managed to watch the entire address — no small feat when you have a two-year old boy — and while the President left Romney’s hot-button tax rate out of his address, he did cap the night by urging Congress to require taxpayers with income exceeding $1,000,000 to pay a minimum effective rate of 30% as part of his State of the Union Address.
This is nothing new from the President, who originally floated the idea of a “Buffet Rule” that would require the nation’s wealthiest taxpayers to pay a minimum effective rate back in September, though at that time it was purely a concept with no framework for application.
This “Buffet Rule’ began to take shape on Tuesday night. While some details remain unclear, it appears this 30% rate on high-earners would be achieved not by substantially increasing the preferential rates currently in place on qualified dividends and long-term capital gains, but rather by eliminating certain deductions such as mortgage interest, tax-free health care, retirement savings and child-care benefits for those with adjusted gross income in excess of $1,000,000. The President made it clear that charitable contributions will not be impacted or further limited by the potential changes.
As we saw back in September, President Obama reiterated his commitment to taxpayers on the other end of the income spectrum, requiring that taxes not increase on those with incomes under $250,000.
Noticeably absent from the President’s address was a proposal discussed in September that taxpayers with income in excess of $250,000 but less than $1,000,000 would see a return to the top tax rates of 39.6% as of January 1, 2013, as well as a 28% cap on certain itemized deductions. I don’t know if this means the President has abandoned this proposed reform on these mid-range earners, or if it was purely omitted from the address. Time will tell.
From a corporate perspective, President Obama was adamant that comprehensive corporate tax reform is necessary to entice U.S. corporations to bring jobs back home. The President recommended a three-prong approach designed to eliminate current incentives that make it more attractive to ship jobs overseas:
- Eliminate tax deductions for outsourcing jobs; replace it with new tax credit to cover moving expenses for companies that close production overseas and bring jobs back to the U.S.
- Remove incentive to locate corporations overseas through an international minimum tax on overseas profits. If all corporations are required to pay a minimum tax on international income, other countries will not be able to entice American business through unusually low tax rates.
- Increase tax breaks for U.S. manufacturers by reducing rates and doubling the tax deduction for high-tech manufacturers.
All in all, there were no great surprises in the address. And let’s be honest, given the current congressional gridlock, the odds of any of these changes being enacted in the near future are extremely slim, reducing last night’s address to one hour of spirited rhetoric.