Posts Tagged ‘political’

Now that was a debate; contentious, revealing, and filled with acrimonious exchanges between two candidates who could barely conceal their distaste for one another. If this were wrestling, Joe Biden would have concluded the night by beating Paul Ryan senseless with a coconut, a la Rowdy Roddy Piper. Tonight was, in short, everything the Obama-Romney debate wasn’t.

Before we get to the tax issues, a couple of quick thoughts:

  • What a difference it makes to have a moderator that controls the flow of the discourse and asks the questions the public wants to hear. Great job by Martha Raddatz.
  • While Obama’s campaign advisors may well have urged him to remain “Presidential,” they were apparently more than happy to take the reins off Joe Biden. Biden attacked everything we expected Obama to address: Romney’s infamous “47 percent” comment, his 13% effective tax rate, and his continued protection of the preferential tax rates afforded “carried interests” — often in an aggressive, accusing manner.  (For more on carried interests, click here).
  • While Biden’s candor was refreshing, his decorum was decidedly less so. Kudos to Paul Ryan for not getting angrier than he did with Biden’s constant laughing and gesticulating while Ryan was speaking. Ryan did strike a blow with that “I think the vice president very well knows that sometimes the words don’t come out of your mouth the right way” shot, but for whatever reason, it came off more as over-rehearsed and ill-timed than a memorable one-liner.
  • Regardless of your political leanings, it’s hard to argue that Biden didn’t have the response of the night when he replied to Ryan’s criticism of the President’s stimulus spending by pointing out that Ryan had written him letters on two occasions imploring Biden to send stimulus money to Ryan’s home state of Wisconsin. To be fair, Ryan had to know Biden’s response was coming, but he was obligated to address the Obama administration’s rampant spending.

Now, on to the tax issues addressed throughout the debate; specifically, what did voters learn about the future of tax policy?

Joe Biden and the $500 Billion Tax Cut for the Wealthy

Tax policy made its first appearance earlier than anticipated, during a discussion on unemployment. Shortly after an impassioned rant about what he perceived to be Romney and Ryan’s apathy towards 47% of Americans, Biden added:

“They’re pushing the continuation of a tax cut that will give an additional $500 billion in tax cuts to 120,000 families. And they’re holding hostage the middle class tax cut because they say we won’t pass — we won’t continue the middle class tax cut unless you give the tax cut for the super wealthy.”

Unfortunately, debates don’t come complete with citations, so the viewing public was likely left struggling to make sense of the genesis of Biden’s statistics. Lucky for you, I’ve got a winning combination of an abundance of free time and a very understanding wife, so I’ve gone ahead and done the legwork for you.

As I discussed in detail here, the Bush tax cuts are set to expire on December 31, 2012. Should that occur, the top individual tax rate will rise from 35% to 39.6%, the next highest rate will jump from 33% to 36%, and each lower bracket will experience an increase as well.

Currently, the primary point of contention between Republicans and Democrats is what to do with those top two tax rates. The President wants to allow those two highest rates to reset to 36% and 39.6%, respectively, while preserving the reduced tax rates from the Bush-era for all of the lower tax brackets. Effectively, this would raise taxes in 2013 on only those taxpayers earning in excess of $200,000 ($250,000 if married filing jointly).

Republicans, on the other hand, have refused to allow an extension of the lower tax rates unless the two highest tax brackets are extended along with them.

So where does the $500 billion come in?

According to the President’s budget for the period 2013-2022, continuing the Bush tax cuts for those earning in excess of the $200,000 threshold — approximately 2% of the population — would cost the government $968 billion in revenue. Click the image below to enlarge the chart taken from the Budget proposal.

A separate study published by the Tax Policy Center indicated that 55% of the total benefit enjoyed by those top 2% of taxpayers that would be impacted by the expiration of the 33% and 35% brackets would inure to the top 0.1% of the population. The TPC then added that the top 0.1% of the population consists of approximately 120,000 taxpayers.

From there, Biden just does some basic math. $968 billion total benefit for the top 2% x 55% enjoyed by the top 0.1% = $532 billion benefit for the top 0.1%, or 120,000 families — if the Bush tax cuts are extended for all taxpayers.

This would be a statistic repeated several times throughout the night, and it served as the foundation for the ensuing argument, in which Biden accused Ryan and Romney of holding the middle class hostage by refusing to extend the Bush tax cuts for the lower brackets, while Ryan responded by claiming that the additional $968 billion in revenue generated by allowing the cuts to expire for the top 2% wouldn’t put a dent in the deficit.

So who’s right?

Quite frankly, they both are.

There really is no compelling need to extend the Bush cuts for the top 2%, unless you are a firm believer that a lower rate will stimulate economic growth, and many are. The idea fronted by blowhards like Bill O’Reilly that if you tax “the achievers,” they’ll simply stop achieving, is spurious and laughable. Rates have been as high as 70% under the Eisenhower administration, and best I can tell, no leading minds of that era put down their pencils and said “To hell with this… I was going to invent the Atari 2600, but a 70% tax rate? Forget it. I’ll just go back to bed.”

But Ryan is also dead on in his analysis: $968 billion — assuming that number is accurate — would not make a dent in our ever-growing deficit. If the Obama administration is serious about reducing the deficit, there would have to be significant spending cuts to make up for the fact that the top 2% simply isn’t big enough to foot the additional tax bill necessary to eat away at our mounting debt.

Of course, arguing that since the $968 billion of additional revenue wouldn’t make a dent, we needn’t bother to collect it isn’t the soundest fiscal argument either, but I get Ryan’s point.  A recent study by the Tax Foundation suggested that simply by cutting the top tax rate to 28%, you could grow the GDP by 7.4% over a 5-10 year window, so perhaps Romney’s plan to cut rates and recover revenue through economic growth has merit. The problems that come with this proposal, as we’ll discuss shortly, lay in its implementation.

But here’s the real oddity of this portion of the debate: Romney’s tax plan does not involve extending the Bush tax cuts for the rich. It involves extending the tax cuts for all taxpayers, then reducing the Bush-era tax rates by an additional 20% across the board. As President Obama referenced several times during the presidential debate, this is expected to cost the government $5 trillion in tax revenue over the next decade, with nearly $2.4 trillion of that benefit going to the wealthiest 2% of taxpayers according to the now-famous Tax Policy Center study. This is a much more meaningful reduction in revenue — and potential corresponding increase to the deficit — then the $500 billion number Biden focused on.

Of course, as we discussed with regards to the previous debate and will do so again below, the Romney campaign promises to pay for any and all lost tax revenue with offsetting reductions or caps to deductions, making the $5 trillion tax cut — in their eyes — no tax cut at all. And while the two candidates did eventually get to discussing this rather important detail, it was through no impetus of their own, but rather the urging of Raddatz. Instead, the voting public had to watch the two candidates debate the merits of a tax plan that is not currently on the table, which likely only served to confuse.

How Do You Define Small Business?

Later in the night, when the discussion formally turned to tax policy, Ryan was asked by Raddatz what portion of the population would pay more, and what portion would pay less, in tax if Romney were elected. Ryan responded:

“Our entire premise of these tax reform plans is to grow the economy and create jobs. It’s a plan that’s estimated to create 7 million jobs. Now, we think that government taking 28 percent of a family and business’s income is enough. President Obama thinks that the government ought to be able to take as much as 44.8 percent of a small business’s income.”

Now, if I were sitting at home (I was) and owned a small business (I don’t), I would take this to mean that my tax rate was about to approach 50%. But there’s an issue of semantics that needs to be addressed:

When Romney and Ryan refer to “small businesses,” they are actually referring to the 36 million taxpayers who report their business income directly on their individual income tax return, and are therefore subject to the individual tax rates at the center of this debate. These business types include sole proprietorships, single-member LLCs, Subchapter S corporations, and partnerships.

What these business types have in common is that they do not pay tax to the government on their own behalf — unlike a Subchapter C corporation, which computes and pays its own tax at the corporate income tax rate — rather, the income of the business “flows through” and is taxed at the individual owner level.

But here’s the issue: of the 36 million taxpayers who own sole proprietorships, single-member LLCs, or an interest in a flow through entity, only 900,000 — or 2.5% — actually pay tax at the two highest tax rates. Stated in another manner, by allowing the Bush tax cuts to expire for those individuals earning more than $200,000, only 2.5% of all “small businesses” would actually pay higher taxes in 2013 than they do today. The other 97.5% of small business owners will pay the same 28% or lower tax rate that they pay today, assuming, of course, the Bush tax cuts are extended for all taxpayers earning less than $250,000.

Don’t believe me? Click to enlarge the chart:

And this is precisely the point Biden should have addressed. With Ryan accusing the President of raising taxes on small business owners, Biden should have been poised to react. And while he did point out that the expiration of the Bush tax cuts for the top 2% would impact only 2.5% of small businesses, he should have added that if the Republicans continue to refuse to extend the Bush tax cuts for the lower brackets, then all small business owners will pay more tax in 2013, as the current rates of 10/15/25/28/33/35% will reset to 15/28/31/36/39.6%.

The Competing Goals of Focused Deduction Elimination and Tax Reform

Soon after the small business conversation, Moderator Raddatz delivered where Jim Lehrer failed miserably in the presidential debate by asking Ryan exactly how Mitt Romney plans to pay for his proposed 20% across-the-board tax cuts. [As a reminder, the reduction in tax rates is expected to cost the government approximately $5 trillion over the next decade, but Romney has promised to offset the lost revenue with additional revenue raisers] Unfortunately, Ryan’s response was nothing more than a vague string of misdirections, devoid of the details tax policy experts — and informed voters — have long coveted:

” Look — look at what Mitt Romney — look at what Ronald Reagan and Tip O’Neill did. They worked together out of a framework to lower tax rates and broaden the base, and they worked together to fix that. What we’re saying is, here’s our framework. Lower tax rates 20 percent. We raised about $1.2 trillion through income taxes. We forego about $1.1 trillion in loopholes and deductions. And so what we’re saying is, deny those loopholes and deductions to higher-income taxpayers so that more of their income is taxed, which has a broader base of taxation..so we can lower tax rates across the board. Now, here’s why I’m saying this. What we’re saying is, here’s the framework…Mitt — what we’re saying is, lower tax rates 20 percent, start with the wealthy, work with Congress to do it…

Now, before I continue, let me remind you that I’m not an Obama guy, I’m not a Romney guy, I’m a tax guy. (in fact, I plan on voting for Kodos) And here’s why you should care about this portion of the debate if you’re a voter.

The vagueness of Romney’s plan is more than frustrating; it is also misleading. For example, a middle-class taxpayer may vote for Romney believing he is voting for a reduction in his top rate from 28% to 22.4% that will leave him with additional after-tax income. However, depending on which deductions are eliminated or capped in order to make the plan revenue neutral, the taxpayer may actually see his federal tax obligation increase, despite the reduced rates.

Because Romney and Ryan have no plan for how they will generate the additional tax revenue necessary to offset the revenue lost to the rate cuts, they can’t possibly promise anyone what the effect of their tax plan will be. They cannot guarantee that those earning in excess of $250,000 won’t see their overall tax share go down, though that hasn’t stopped them from trying. They can’t guarantee that the middle class won’t see their tax obligation increase, though that hasn’t stopped them from trying. They can’t promise any of these things, because they have no idea how the plan will work.

Just one week ago, Romney used the Presidential debate to introduce the idea of capping certain deductions rather than eliminating them, which was taken seriously enough that Bloomberg had yours truly run a bunch of numbers quantifying what a cap would mean to the middle class. Yet tonight, Ryan made no mention of this potential $17,000/$25,000/$50,000 cap, and instead focused again on eliminating deductions. Either Ryan and Romney aren’t on the same page, or, much more concerning, there is no page.

Is it mathematically possible to fully pay for a 20% reduction in tax rates by eliminating deductions? Probably, as we’ve already covered that here. Is it possible without shifting a portion of the tax burden from those earning in excess of $250,000 to those earning less than the threshold? That’s up for debate, but it would require an extreme top-down approach, where the wealthy lost all their deductions first, and even then the result is in question. But the point is, neither Romney nor Ryan can know it’s possible, because they have no plan, only a framework.

And as a voter, you must keep this in mind, because you may be enticed by the promise of a 20% reduction in your tax rate, only to discover in April 2014 that your mortgage interest or state tax deduction is of limited or of no use, and your tax obligation has actually increased over prior years.

What I find most frustrating is that the calendar has turned to October, and I still can’t formulate an opinion as to whose tax plan — Obama’s or Romney’s — I prefer, solely because I don’t know exactly what Romney’s plan entails. Obama’s plan is unappealing to me for a number of reasons — not the least of which are the potentially damaging effect on the deficit and the painful “Obamacare” surcharges — but at least it’s a known quantity.

One final thought for other tax eggheads: the idea that Ryan mentioned this plan and “tax reform” in the same breath is borderline offensive. True tax reform entails removing some of the countless loopholes from the Code for good, leaving the tax law more manageable than it was before.  What Romney and Ryan are promoting is complexity to an unimaginable degree, attempting to cap certain deductions for a certain part of the population, while leaving the deductions in the Code for other taxpayers to enjoy.

On the bright side, it would keep me swimming in business.

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With the battle surrounding the Bush tax cuts between President Obama and Mitt Romney taking center stage as the election nears, an area of the tax law where the two candidates may have even more disparate views has slipped into the background.

In the international tax arena, Mitt Romney has thrown his support behind a move to a pure “territorial” tax system. In such a system, U.S. tax would never be imposed on income earned from non-U.S. sources by a foreign subsidiary of a U.S. corporation. The foreign subsidiary would also be permitted to repatriate the earnings with tax-free dividends to its U.S. parent, which — the theory goes — would eliminate the current penalty for bringing foreign earnings back to the U.S., and thus encourage domestic investment and growth.

Detractors of the territorial system — with President Obama foremost among them — argue that this system encourages U.S. corporations to shift operations to jurisdictions with lower tax rates, taking jobs and revenue along with them and eroding the U.S. tax base. As a result, the President has strongly encouraged legislation that would penalize U.S. corporations that move business overseas, while providing incentive in the form of tax breaks for those U.S. companies that currently have operations abroad to bring business back home.

It appears Senate Democrats are ready to push forward with the President’s mandate, as they announced today that the plan to vote next month on a proposal that would accomplish both goals.

The proposed legislation, titled the “Bring Jobs Home Act,” would grant companies a  20% tax credit for the expenses incurred in bringing jobs and investment to the U.S., while also denying companies a deduction for the expense of moving investment out of the U.S.

With regards to the credit, the bill provides that if pursuant to an insourcing plan, a company incurs expenses (aside from normal operating expense and severance expenses) to eliminate a business unit located outside the U.S. and establish a new business unit in the U.S., then upon completion of the relocation the taxpayer is entitled to a credit equal to 20% of the qualified expenses. The bill also provides that the taxpayer may alternatively elect to take the credit in the year after it would typically be allowed.

On the disallowance of the deduction for outsourcing U.S. activities, proposed I.R.C. § 280I would deny any expenses incurred by the taxpayer to relocate the operations outside the U.S. For these purposes, the definition of “expenses” is the same as that used in defining the expenses eligible for the credit.

Voting should take place by July 4th.

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As you may have heard several thousand times over the past few years, President Obama would really like to see the Bush tax cuts expire at the end of the year for America’s wealthiest taxpayers, arbitrarily identified as those with taxable income in excess of $250,000. Should this occur, the top two tax rates for those above the threshold would return from the present-day 33 and 35% to 36 and 39.6%. The current rates for those earning less than $250,000 would remain at 10, 15, 25 and 28%.  

Two weeks ago, House Democratic Leader Nancy Pelosi made news by deviating from the President’s plan, arguing that the Bush tax cuts should be extended for all taxpayers earning less than $1,000,000, a threshold four times larger than Obama’s proposed cutoff.

One would have to think that Pelosi’s proposal is a bit of election-year gamesmanship. Democrats have long maintained that the reticence of their Republican counterparts to allow the Bush cuts to expire has far more to do with protecting the tax rates of the nation’s wealthy than it does a desire to reduce the deficit. By raising the cutoff for the expiration of the reduced rates from $250,000 to $1,000,000, Pelosi likely believes she can back Republicans into a corner: if they still refuse to embrace the cuts at the higher level, Pelosi and other Dems will paint their counterparts as aligning with the nation’s millionaires at the risk of punishing the middle class.  

To the surprise of no one, Pelosi’s plan was largely panned within her own party, with many Democrats claiming her plan would raise far less revenue than the Obama proposal, while also representing a windfall for many households earning $1 million, because they would get the benefit of reduced graduated rates on their income up to $1 million.

Today, the Joint Committee of Taxation got around to putting pencil to paper, and whether or not they validated the concerns of Pelosi’s party-mates depends on your materiality level and how you define “far less” when looking at the deficit. According to the report, which was released by the Center on Budget and Policy Priorities but credited to the Joint Committee, quadrupling the income threshold marking the expiration of the Bush tax cuts from $250,000 to $1,000,000 would raise only $463 billion over 10 years rather than $829 billion.

That sounds like a hefty difference, but then again, to put it in perspective, by merely extending the 2% payroll tax reduction through 2012, Congress was willing to tack $100 billion on to the deficit. So who knows: perhaps those in Congress would view sacrificing $360 million over 10 years in order to avoid the expiration of the Bush tax cuts for all taxpayers as money well spent.

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In the not-too-distant future, it’s entirely possible that jet packs will replace Segways as America’s preferred mode of personal travel, online dating will create matches so perfect as to eliminate the thrill of romantic conquest, and Republicans will rule the White House, Senate, and House of Representatives.

Martin Sullivan, who writes about tax as well as anyone, takes on the final possibility and reaches a surprising, but completely accurate, conclusion: even if Mitt Romney wins the presidential election this November and Republicans keep the House and retake the Senate, Romney’s proposed sweeping tax cuts are unlikely to become law.

And why not?

Because as we discussed here, tax cuts come at the price of reduced revenue, and given the current and budgeted deficit, lost revenue is something America can ill afford at the moment.

As a reminder, Romney is proposing to extend the Bush tax cuts, while also tacking on a 20% across-the-board reduction to each marginal rate. In addition, he would eliminate the tax on interest, dividends and capital gains for taxpayers earnings less than $200,000, eliminate the estate tax and the AMT, and cut the corporate rate to 25%.

Even if Democrats continue to control the Senate, Romney would be able to circumvent having his proposals blocked in the Senate by presenting them as “budget reconciliation bills,” essentially giving Romney carte blanche to enact any desired tax legislation.

But as Sullivan posits, Romney’s cuts are unlikely to become law due to their staggering price tag: $480 billion in lost revenue in 2015 alone. To enact his proposals without adding to the deficit, Romney would have to generate tax revenue elsewhere. To that end, he has privately disclosed his desire to broaden the tax base by eliminating some popular deductions, but Romney would have to do away with all of the popular deductions listed below, and many more, to cover the cost of his cuts. These deductions represent a mix of those backed by special interest groups (the mortgage deduction), and those that promote philanthropy (the charitable contribution deduction.)  As a result, as Sullivan points out, “there is nothing in history to suggest that this is even a remote political possibility.”

Table 1. Official Revenue Estimates of Major Tax Expenditures

Tax Expenditure Fiscal 2015

Deduction for mortgage interest $113 billion
Charitable deduction $57 billion
Deduction for state and local taxes $85 billion
Exclusion for employer-provided health benefits $176 billion

Source: Joint Committee on Taxation, ‘‘Estimates of Federal Tax Expenditures for Fiscal Years 2011-2015,’’ Jan. 17, 2012, Doc 2012-894, 2012 TNT 11-21.

Sullivan goes on to nicely summarize the reality of our current economic morass and its impact on tax policy:

And that means that even if Romney wins and Republicans are running Congress, it is unlikely Washington will go on a tax cutting frenzy. Republicans may be unconstrained by Democrats, but they will be constrained by themselves. Basebroadening tax reform is not a battle of partisan politics but of special interest politics. And special interests will still be alive and well after a Republican sweep. If the Republicans try anything too gimmicky with how they score the tax cuts, alarm bells will sound in the bond market — something a president with close ties to Wall Street is unlikely to tolerate.

No doubt there will be spending cuts in social programs, but one must believe most of the savings will be devoted to deficit reduction. This is not 1981. This is not 2001. The next president, regardless of whether it is Obama or Romney, must put federal finances on a sustainable path. It is hard to see how a President Romney could propose a plan that significantly cuts taxes. If his plan must be revenue neutral, or close to it, the amount of rate reduction it can achieve will be severely limited.

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Having had the opportunity to review President Obama’s newly released 2011 tax return for Bloomberg news this morning, one thing is immediately obvious: the President’s tax return stands in stark contrast to the 2010 return previously released by his Republican counterpart, Mitt Romney. One look at the candidates’ tax filings makes it clear why tax policy will likely play an integral role in the upcoming election, as the dramatic differences evident in the determination of each man’s tax liability are mirrored in their respective tax proposals. 

Based purely on their respective tax filings, President Obama will be sure to portray himself as the “every man” in the upcoming election, despite being among the top 1% of earners in America. To the contrary, Mitt Romney, through no fault of his own, is likely to be painted as the embodiment of a broken tax system. This difference in perception will be due to a number of factors evidenced in their respective tax returns:

Sources of Income

The overwhelming majority of President Obama’s taxable income in 2011 was of the ordinary variety — wages of $395,000, self-employment income from book sales of $441,000, and taxable interest of $11,000. The President had no investment income in the form of qualified dividends or long term capital gains during 2011. In fact, Obama does not appear to be invested in the stock market to any material degree. As a result, the President derives no benefit from the 15% preferential tax rate afforded to these classes of income by the Bush tax cuts.  

To the contrary, on his 2010 tax return, Mitt Romney reported no wages and relatively minimal self-employment income. Instead, of his $21,600,000 of adjusted gross income, $5,000,000 was in the form of qualified dividends and $12,500,000 was generated as long-term capital gains. Courtesy of the Bush tax cuts, all of this income was taxed at the preferential 15% tax rate.

Level of Transparency

President Obama owns no rental properties, holds no interests in partnerships, S corporations, or trusts, and he fully maximizes his retirement plan contributions.  Even the President’s itemized deductions give the appearance of relative “normalcy;” he has a mortgage on his home and  his real estate taxes are a “reasonable” $22,000.

In contrast to the President, sophistication and complexity permeate Romney’s return. He holds interests in multiple trusts and rental properties, and his return is littered with informational filings related to numerous offshore investments. He owns no mortgage on his home, but paid over $226,000 in real estate taxes during 2010.

Effective Tax Rate

Due to his combination of considerable ordinary income, the absence of qualified dividends and long-term capital gain, and a moderate amount of itemized deductions, the President’s effective tax rate in 2011 was 20.5%. This is a number many American’s are likely to find more palatable than the 13.9% paid by Mitt Romney in 2010, particularly in light of the fact that President Obama’s adjusted gross income was $789,000, compared to the $21,600,000 Romney reported.  

Industry-Specific Tax Breaks

Perhaps most egregious in the eyes of observers, a substantial portion of Romney’s income is subject to one of the more hotly debated tax breaks currently available in the Code: the 15% tax rate afforded “carried interest.” This break allows private equity fund managers such as Romney to pay tax on the allocable share of fund income they receive in exchange for management services at a rate of 15% if the allocable income is in the form of long-term capital gains or qualified dividends, despite the fact that compensation for services rendered is typically taxed at ordinary rates.

 To the contrary, President Obama receives no industry-specific breaks.

Reflections in Tax Policy

Perhaps more so than in any election in recent memory, the tax returns filed by President Obama and Mitt Romney provide a window into their tax policies.

President Obama has built his platform on what he calls “fairness.” It is time, he insists, for the wealthy to pay their share. To do so, he proposes changes that would impact his tax situation minimally, but would drastically change that of his opposition and many of the nation’s wealthy.  

The President has vowed to repeal the Bush tax cuts, which would increase the top rate on ordinary income from 35% to 39.6%. While this would increase the tax imposed on Obama’s wages and self-employment income, it alone would do little to effect those of Romney’s ilk who earn their income predominately from qualified dividends and long-term capital gains.

To that end, the President has proposed returning the tax rate on qualified dividends to the top ordinary rate of 39.6%, while the tax on long-term capital gains would increase from 15% to 25% for those with adjusted gross income in excess of $250,000. These changes, if implemented, would have virtually no impact on the President’s tax liability, courtesy of his lack of investment income.

Romney, on the other hand, would feel a significant pinch, as the tax on his $5,000,000 of qualified dividends would increase by 24.6%, with the tax on his long-term capital gains of $12,000,000 jumping by 10%.

The President’s war on the perceived inequities doesn’t end there, however. He proposes two more law changes that would ensure Romney and other wealthy taxpayers pay there “fair share.” First, Obama would put an end to the tax break on carried interest, meaning much of Romney’s long-term capital gains would be taxed as ordinary income, at a maximum rate of 39.6%. In addition, the President proposes to institute the much-discussed “Buffett Rule” — named after the billionaire business magnate who stirred the hornet’s nest by famously claiming that he paid a lower tax rate than his secretary — which would guarantee that taxpayers earning over $1,000,000 in AGI paid a minimum effective tax rate of 30%.

Given that President Obama’s adjusted gross income did not exceed $1,000,000 in 2011, the Buffett Rule would not affect his tax liability. For Mitt Romney, on the other hand, the Buffett Rule would more than double his effective tax rate and his resulting tax liability.

It is this difference in their current and potential tax liabilities that the President will play up in his ensuing campaign. In order to chip away at the deficit, the President will insist, the nation’s wealthy must no longer be able to take advantage of industry-specific tax breaks and preferential tax rates and start pulling their weight, in the name of both fiscal responsibility and social equitability.

In direct contrast, Mitt Romney has built his tax platform on an array of tax cuts that could easily be dismissed as self-serving, but in fact may well do more to stimulate the economy and reduce the deficit than the increases proposed by the President.

Romney proposes to cut the tax rates for all Americans, with the maximum tax rate on ordinary income dropping to 28%. This would result in a 7% reduction on the President’s wages, but would have little effect on Romney’s return, with its absence of wages and self-employment income.

Where Romney would benefit greatly, however, is his proposal to keep the tax rate on long-term capital gain and qualified dividends at 15%. While this would preserve the preferential tax rate applied to the overwhelming majority of his income, Romney does not hoard the benefits all for the super wealthy. Instead, he proposes that taxpayers earning less than $250,000 in AGI be able to earn interest, dividends, and long-term capital gains tax free, a law change that would certainly motivate the middle class to save and invest.

Romney would keep the current preference on “carried interest” in place and also attempt to repeal the estate tax, two policies that are likely to be perceived as his catering to the super wealthy. As the majority of Americans will never have to concern themselves with carried interest or be subject to the estate tax, they may well see this as Romney aiming to protect his fortune and those of his Republican constituents, further alienating him in the eyes of many.

It’s rare that the tax world takes over the front pages, but judging by the immediate and widespread reactions to the President’s release of his tax return this morning, it appears the tax policies of Obama and Romney have become the focal point of the upcoming election.

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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:

  1. 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.
  2. 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.
  3. 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.

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