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White House unveils tax-rate details

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