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Obama Budget Proposes Doubling Dividend Tax on Wealthy, Implementing Buffett Rule

By on February 13, 2012

President Barack Obama’s budget plan calls for taxing dividends received by high-income taxpayers as ordinary income, raising the top rate to 39.6 percent from 15 percent.

The proposal, in the president’s fiscal 2013 budget released today, would reverse his previous policy that called for taxing dividends more lightly than wage income. Obama would treat dividends as ordinary income for married couples making more than $250,000 a year and individuals making more than $200,000.

In all, compared with current tax policies, today’s budget would raise $1.4 trillion over the next decade from high-income taxpayers.

The dividend tax proposal would raise $206.4 billion over 10 years. Obama is proposing a top individual income tax rate of 39.6 percent in 2013, up from 35 percent. His budget would tax capital gains at a top rate of 20 percent, up from 15 percent. The top dividend tax rate is now 15 percent.

Another 3.8 percent tax on the unearned income of couples earning $250,000 and individuals making at least $200,000 will take effect in 2013 as part of the 2010 health-care law.

The administration’s fiscal 2012 budget had said that setting the top capital gains and dividend tax rates at 20 percent “reduces the tax bias against equity investment and promotes a more efficient allocation of capital.” Before 2003, all dividends had been taxed as ordinary income.

Taxing High Earners

The proposal is part of Obama’s attempt to tap the wealthiest Americans to reduce the federal budget deficit.

“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said in a speech at Northern Virginia Community College in the Washington suburbs today.

Along with the rest of the administration’s proposed tax increases, the change in the dividend tax will probably run into resistance from Republicans and business groups. A coalition of companies, including AT&T Inc. and United Parcel Service Inc., has been lobbying to maintain the rates on capital gains and dividends.

Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington, said the administration’s proposal to tax dividends at higher rates than capital gains is surprising, because capital gains tend to go to people with the highest incomes.

“What is the policy difference that the administration has suddenly found between qualified dividends and capital gains?” he said. “Why do they get different rates now?”

‘Buffett Rule’

The administration also wants to impose a 30 percent minimum tax for individuals with annual income of at least $1 million, known as the “Buffett rule” after billionaire investor Warren Buffett, who originated the idea last year.

That would replace the alternative minimum tax, “which now burdens middle-class Americans rather than stopping the richest Americans from paying too little as was originally intended,” the administration said.

Buffett, in a New York Times opinion piece in August, said that in 2010 he paid a lower tax rate – 17.4 percent — than “any of the other four people in our office.”

The budget proposal doesn’t say how much revenue the Buffett rule would generate and it doesn’t provide details on how the rule would affect individuals’ tax calculations. The U.S. collected $39.1 billion from the alternative minimum tax in 2011, according to projections from the Tax Policy Center, a nonpartisan research organization in Washington.

Effects of AMT

The AMT, in its current form since 1986, requires taxpayers to compare their tax liability under the regular tax code with their liability under the alternative minimum regime. Because the AMT doesn’t allow the full benefits of state and local tax deductions or personal exemptions, people with large families or who live in high-tax states tend to be disproportionately affected.

The exemption levels aren’t permanently indexed for inflation so, unless Congress acts to blunt its spread, millions more taxpayers will pay the alternative tax next year. If Congress doesn’t act, the number of people paying the AMT will jump from 4.3 million to 31.2 million, according to theTax Policy Center.

Obama’s budget revives calls to allow the 2001 and 2003 tax cuts on income and capital gains to expire at the end of 2012 for families earning more than $250,000 a year and cap itemized deductions and other tax benefits for these families at 28 percent.

Private Equity Managers

His plan would tax the profits-based compensation paid to private equity managers at ordinary income rates instead of a preferred 15 percent rate and curtail tax breaks for corporate jets and oil and gas companies.

Obama also reintroduced previous years’ proposals to limit companies’ ability to defer taxation on income earned overs He proposed new tax breaks for business that hire more workers and for manufacturers.

The administration proposed increasing the fee airline passengers pay to fund theTransportation Security Administration to $5 per one-way flight, increasing 50 cents each year to $7.50 in 2018. The fee is currently $2.50 a flight segment, or $2.50 for a direct flight or $5 for a one-way trip with a connecting airport.

Airport Security

The fee, installed to pay the cost of added security after the Sept. 11 terrorist attacks, recovers 43 percent of aviation security costs, according to the budget plan. The new fee would collect $9 billion over five years and $25.5 billion over 10 years. About 70 percent of the money would be used to reduce the budget deficit.

The budget plan anticipates collecting $1.4 billion in fees for Food and Drug Administration drug reviews and inspections of drugmakers’ plants and food production. That includes a new fee for reviewing generic drugs that would raise about $300 million.

Obama is proposing an overhaul of the corporate tax system that would eliminate tax benefits to lower the corporate rate from its current maximum of 35 percent. The budget plan doesn’t include details on the rate the administration would prefer or which tax provisions it would eliminate.

The administration plans to release more details on its corporate tax revisions this month.

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