Double Taxation: A Take On All Things Taxes

There are certain things you can count on recurring every four years: February gets one day longer, people actually care about hockey, the U.S. women fall short in the World Cup, and concerns over tax law move to the forefront of public consciousness.  Such concerns are poised to reach a fever pitch on Monday, as President Obama plans to release his 2013 budget. Coming in an election year — and with the country’s debt currently standing at astronomical levels — this budget stands to be as heavily scrutinized as any in recent memory, with much of the focus squarely on the president’s tax proposals.

Over the past six months, President Obama has floated varying forms of a general framework for tax reform, but with the 2013 budget release, Republicans and Democrats alike will finally get their first look at specific elements of the president’s plan.  

What will we see? Assuming President Obama sticks to the principles he laid out during his Deficit Reduction Plan and State of the Union Address — we can expect the following:

Individual Proposals

• Repeal of the Bush tax cuts for taxpayers earning more than $250,000 effective 1.1.2013. For these “wealthy” individuals, the maximum individual tax rate will return to 39.6%, qualified dividends will again be taxed at ordinary rates, and the tax on long-term capital gains will rise from 15% to 20%.
• Removal of the tax advantage currently afforded to private equity fund managers who receive a grant of a pure “profits interests” in a fund in exchange for management services. These “carried interests” allow the fund managers to receive allocations of future income that is primarily taxed at the favorable long-term capital gains rate. The president will likely propose to tax subsequent allocations of income resulting from the grant of a profits interest as compensation for services, taxed at ordinary income rates.
• In what is easily the most highly anticipated — and sure to be the most heavily criticized — aspect of the president’s 2013 plan, the “Buffet Plan” will finally come to fruition. The proposal will likely recommend an alternative calculation (in addition to the existing alternative minimum tax) that will ensure that taxpayers earning over $1,000,000 pay tax at an effective rate of at least 30%.
• A limitation on itemized deductions for individuals earning more than $250,000 (or perhaps only on those earning more than $1,000,000 as part of achieving the goals of the “Buffet Rule”). Based on the president’s August proposal, the mortgage interest deduction could be the first to go.
• Extension of the current 2% reduction on an employee’s share of payroll taxes. Set to expire in three weeks, the president has been adamant that the cut stay in play for the remainder of 2012. Whether he carries it into 2013 remains to be seen.

International Proposals

• In his State of the Union Address, President Obama professed a desire to implement a minimum tax to be paid by U.S. corporations on its operations overseas. This is likely to be built into the 2013 budget in some shape or form.
• Enactment of a tax credit for corporations willing to move international operations back to the U.S.
• Doubling the Section 199 deduction to 18% for U.S. manufacturers.

Corporate Proposals

• Cutting the corporate tax rate from 35% to something in the low-to-mid twenties. Reuters is reporting that the President is planning to urge Congress to enact this change in 2012, but the odds of a law change of this magnitude happening in an election year is extremely slim.

If these proposals are in fact a part of the president’s 2013 budget, we’d be well advised to grab some popcorn, sit back, and await the swift response from the Republican party. The “Buffet Rule” in particular is sure to incite further cries of socialism and class warfare from the Romney and Gingrich camps — particularly in light of the sweeping tax cuts they are floating —  and may well cause Rush Limbaugh and Bill O’Reilly to spontaneously combust.