The Wall Street Journal
MAY 12, 2009
White House Unveils Tax-Rate Details
Higher Rates Would Hit Couples at ‘Taxable-Income’ Levels Starting at About
$235,000
By JOHN D. MCKINNON
WASHINGTON — The Obama administration provided more details on the scope of
its tax proposals, showing the impact of rate increases on higher earners
would hit couples with about $235,000 of “taxable income,” or income after
deductions and exemptions.
The administration also revealed new details of its initiatives to shut down
offshore tax shelters used by some investors and businesses, and to raise
taxes on the overseas earnings of many U.S. multinationals.
During the presidential campaign, Barack Obama said he wouldn’t raise taxes
on couples earning less than $250,000 but didn’t give a precise definition
of the term. On Monday, the administration published more details of how
exactly the rate increases, if approved by Congress, would be implemented.
The Treasury Department’s description, known as the “green book,” showed
that the new 36% rate would apply to an adjusted gross income of $250,000
“less the standard deduction and two personal exemptions.” Those items
effectively represent the minimum that a couple could subtract from adjusted
gross income, officials said. A senior administration official estimated
that that produces taxable income of about $235,000.
Many couples with adjusted gross income of $250,000 have itemized deductions
that would put their taxable income well below that $235,000 threshold.
The current rate for taxpayers in that income level is 33%, which now
applies to taxable income starting at about $209,000. The current highest
tax rate is 35%. That would rise to 39.6% under the Obama proposal. That
bracket currently starts at about $373,000. The exact income level for that
bracket in the 2011 tax year hasn’t been determined yet.
Doug Holtz-Eakin, a former top adviser to Republican presidential candidate
John McCain, said Monday’s announcement might sound like backtracking. “The
truth is it just wasn’t clear,” he said. “But the pledge was if you were
making $250,000, you’re safe. This doesn’t sound exactly consistent with
that.”
But a senior administration official said the $250,000 threshold always
referred to AGI. Another official defended the implementation of the
proposal as “very conservative.”
Rosanne Altshuler, the co-director of the nonpartisan Tax Policy Center,
said the impact of the tax increase could be muted for many higher-income
couples, and some might even see a tax cut. That is because the tax rate on
some of their taxable income — between about $209,000 and $230,000
currently — would fall under the Obama proposal from 33% to 28%.
Administration officials also defended a related plan to reduce the value of
deductions for people with AGI of $250,000 and up, as a way to help pay for
the cost of overhauling the health-care system. The plan has run into
serious opposition. But an official said it could yet become a viable
solution, if other ways to pay for health care can’t be found.
The administration also laid out plans to attack several offshore tax
shelters, including one that aims to help investors receive corporate
dividends without incurring U.S. withholding tax.
Two other proposals would go after techniques that multinationals use to
minimize taxes by shifting around intangible property and internal debt
among overseas subsidiaries. Yet another proposal would seek to put further
limits on the foreign tax-credit system. The newest proposals would raise
about $10 billion in the decade.
Business leaders have been sharply critical of the administration’s proposed
crackdown on offshore tax avoidance, including limits on companies’ ability
to defer U.S. taxes on their overseas income. The deferral system was
intended to put overseas operations of U.S. companies on the same footing as
their foreign counterparts.
“The proposed tax increases on U.S. companies by the Treasury threaten the
jobs of tens of millions of U.S. workers and our future economic growth,”
said John Castellani, president of the Business Roundtable. “Adopting these
changes will hamstring American competitiveness.”
The administration believes the system has gotten out of hand in recent
years, allowing excessive tax avoidance by multinationals, and also hurts
domestic rivals and discourages U.S. job creation.
The tax increases, mostly taking effect starting in 2011, would raise about
$351 billion over the next decade from investors and businesses — including
$36 billion from oil companies — and another $615 billion over the decade
from individuals earning more than $250,000.
The administration’s plans also provided new details of its proposals to
create a system of automatic enrollment in individual retirement accounts
for many lower-wage workers who don’t have access to savings plans at work.
To make the system more valuable, it also is proposing to expand a tax
credit that adds a government match for retirement savings for such workers.
Write to John D. McKinnon at john.mckinnon@wsj.com
Obama Targets Overseas Tax Dodge
Plan Would Crack Down On Individuals, Firms With Money Abroad
By Lori Montgomery and Scott Wilson
Washington Post Staff Writers
Tuesday, May 5, 2009
President Obama yesterday announced a major offensive against businesses and wealthy individuals who avoid U.S. taxes by parking cash overseas, a battle he said would be fought with new tax laws, new reporting requirements and an army of 800 new IRS agents.
During an event at the White House, Obama said his proposal would raise $210 billion over the next decade and make good on his campaign pledge to eliminate tax advantages for companies that ship jobs abroad.
“I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens,” Obama said, flanked by Treasury Secretary Timothy F. Geithner and Internal Revenue Service Commissioner Douglas Shulman.
The nation’s largest business groups immediately assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger U.S. jobs. Key Democrats were cool to the plan, and said Obama’s ideas should be considered as part of a broader effort to streamline the nation’s complex corporate tax code.
“Further study is needed to assess the impact of this plan on U.S. businesses,” Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, which has jurisdiction over U.S. tax law, said in a written statement. “I want to make certain that our tax policies are fair and support the global competitiveness of U.S. businesses.”
Yesterday’s announcement offered the first details of a tax plan that was sketched out in the $3.4 trillion budget request that Obama sent to lawmakers earlier this year and that Congress approved last week. If the measures do not survive congressional scrutiny, the lost revenue would increase already-elevated deficit projections, unless lawmakers find money elsewhere.
Obama said his plan could serve as “a down payment on the larger tax reform we need to make our tax system simpler and fairer.”
The proposal takes aim at what corporate executives consider to be one of the most critical features of the U.S. tax code: permission to indefinitely defer paying U.S. taxes on income earned overseas.
Currently, U.S. companies can avoid paying taxes on foreign profits until they bring the money back home. So a U.S. company doing business in Ireland, for example, must pay the Irish tax of 12.5 percent, like every other company doing business in Ireland. But the U.S. firm would owe an additional 22.5 percent to the U.S. Treasury (the difference between Ireland’s tax rate and the 35 percent U.S. tax rate) unless it reinvests the money overseas.
The United States is the last major economic power to tax the profits of locally headquartered companies if that income is earned abroad. Other nations, including most recently Japan and Britain, are moving to a territorial system that taxes only corporate profits earned within their borders.
Instead of following that trend, Obama proposes to move in the opposite direction. He argues that the current system gives tax breaks to U.S. multinationals at the expense of companies that operate solely on American soil. In 2004, the most recent year for which statistics are available, U.S. multinationals paid an effective U.S. tax rate of just 2.3 percent on $700 billion in foreign profits, according to the administration.
“It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York,” the president said yesterday.
To level the playing field, Obama would bar firms from taking deductions for expenses that support their overseas investments until they pay U.S. taxes on the profits. He would also crack down on firms that overstate their foreign tax bills. And he would reverse a Clinton-era rule known as “check the box,” which permits firms to more easily transfer cash between countries. In practice, Obama officials said, “check the box” has been used to shift income away from higher-tax countries and into tax havens such as Bermuda and the Cayman Islands, allowing firms to reduce their tax bills both at home and abroad.
Those provisions would take effect in 2011 and would raise about $190 billion by the end of the next decade. In return, Obama proposes to make permanent an existing tax credit for companies that spend money on domestic research and development programs, worth about $75 billion over the next decade.
Obama also proposes to crack down on wealthy people who evade taxes through offshore bank accounts, primarily by targeting financial institutions in tax-haven jurisdictions. That plan, which would net another $9 billion over the next decade, appears to have few opponents.
By contrast, more than 200 U.S. companies and trade groups have signed a letter asking congressional leaders to oppose Obama’s proposal to limit their ability to defer U.S. tax payments. The letter, signed by Alcoa, General Electric, McDonald’s and Microsoft, among others, warned that restricting the deferral rules would make it difficult to compete abroad.
The U.S. Chamber of Commerce also denounced Obama’s plan. And John Castellani, president of the Business Roundtable, a coalition of the nation’s largest firms, called it “the wrong proposal at the wrong time for the wrong reasons” that will “make us less competitive in the international marketplace, where, by last count, 95 percent of the world lives.”
Rosanne Altshuler, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, said some of Obama’s proposals have merit. But “the big question mark is whether limiting deferral will lead to more jobs in the U.S., and it’s not clear to me that this is what will happen.” Instead, Altshuler said, the result may be to create a tax advantage for U.S. firms to be acquired by foreign owners, an “unintended consequence” that “would probably be bad.”
“There’s a big difference between abusive tax avoidance and legitimate tax policy that recognizes the global economy,” said Sen. Charles E. Grassley (Iowa), the senior Republican on the Senate Finance Committee. “To the extent the president continues on the road of cracking down on tax abuse, he can count on my support. But if he’s using tax shelters as a stalking horse to raise taxes on corporations at the cost of U.S. jobs, he’ll lose me.”
House and Senate Approve Final Budget Resolution
The Tax Justice Digest
May 1, 2009 5:02 PM
Approval Marks a Major Step Towards Enacting President’s Agenda
On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President’s major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.
The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.
Tax Cuts Extended for All but the Rich
For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush’s cuts in the estate tax were enacted.
The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them — on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.
Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).
For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.
Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.
Final Budget Leaves Out the Senate’s Outrageous Estate Tax Cut
Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, “It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy.” His common sense view carried the day as negotiators hammered out the final resolution.
The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.
The budget resolutions passed out of the House and Senate budget committees in March both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.
Incredibly, 51 Senators voted in favor of the amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment called for a $10 million exemption for married couples and a 35 percent rate.
Taking Steps Towards Enacting the President’s Priorities
Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as “reconciliation” which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.
The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate’s members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President’s important initiatives.
Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.
The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.
Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to “ram through” the President’s agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.
Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes.